r 


How  to 

Analyze  Industrial 
Securities 


How  to  Analyze  Industrial 
Securities 


By  CLINTON  COLLVER,  M.  C.  S. 

Manager  Investment  Department 
New  York  Stock  Exchange  firm, 
Author  "Industrial  Securities"  pre- 
pared for  the  Investment  Bankers' 
Association  of  America 


THIRD  EDITION 


Published  by 

MOODY'S     INVESTORS     SERVICE 

JOHN  MOODY,  President 

35  Nassau  Street,  New  York  City 

1921 


Copyright,  1921,  by 

MOODY'S  INVESTORS  SERVICE 

NEW  YORK 

All   Right*    Reserred 


PREFACE 

Since  the  second  edition  the  industrial  boom  was  dis- 
placed by  the  trying  business  drouth  of  1920.  Those  cor- 
porations which  conserved  cash  will  come  through.  How- 
ever, some  companies  which  declared  earnings  out  in  divi- 
dends are  in  better  shape  than  those  which  converted  cash 
into  idle  plant  extensions.  Such  foolish  action  exchanged 
the  very  choicest  of  assets  into  virtual  liabilities ! 

Part  of  our  industries  had  been  keyed  up  to  supplying 
the  demands  of  super-prosperity  here,  plus  unusually 
large  foreign  requirements.  Yet  many  industrial  mana- 
gers planned  inventories  and  capacity  as  though  demand 
would  be  multiplied  indefinitely. 

By  now,  however,  calm  vision  has  displaced  mirage. 
"Book  value"  measurement  has  been  displaced  by  the  yard 
stick  of  earnings.  The  inherent  weakness  of  "net  current 
assets,"  composed  all  or  mostly  of  goods,  has  received 
practical  demonstration.  Several  warnings  given  in  this 
and  previous  editions  look  mild  enough  in  the  light  of 
recent  developments. 

Yet  in  spite  of  troubles  contemporary,  there  is  no  doubt 
but  that  well  financed  and  managed  industrials  will  con- 
tinue to  deserve  and  receive  high  investment  regard. 

This  book  has  been  written  for  those  who  have  taken 
care  of  the  pennies,  but  who  have  found  their  dollars 
under  constant  siege  by  deceptive  "opportunity." 

Taking  the  positive  angle,  this  book  is  particularly 
intended  to  be  helpful  in  pointing  the  way  to  profit- 
able investment  and  speculation.  Analysis  is  profit- 
able because  so  many  will  not  avail  themselves  of 


524002 


it,  because  so  many  are  willing  to  labour  years  in 
accumulating  funds  which  they  take  minutes  to  place. 
So  in  times  good  or  bad  the  markets  are  full  of 
anomalies,  securities  which  are  selling  entirely  out 
of  line  with  the  general  run. 

If  all  investors  and  speculators  based  their  commit- 
ments upon  cool  analysis,  the  security  markets  would 
be  dull  localities.  However,  human  nature  does  not 
change.  In  the  days  of  the  Mississippi  Bubble  and 
today  the  same  tendencies  have  prevailed.  Cupidity 
still  holds  sway,  but  creates  opportunities  available 
to  those  who  will  determine  their  purchases  and  sales 
upon  analysis  instead  of  hopes. 

Effort  has  been  made  to  bring  out  method  of 
analysis  by  the  use  of  concrete  illustrations  taken 
from  well-known  corporations,  rather  than  by  theo- 
retical dissertation. 

I  have  not  attempted  to  bring  all  figures  in  this  edition 
strictly  to  date.  Many  figures  for  1919  and  1920  seem 
anything  but  indicative  of  the  less  erratic  conditions 
which  most  of  us  now  expect. 

Acknowledgment  is  gladly  made  for  help  received 
at  New  York  University,  and  especially  to  Dr.  A. 
M.  Sakolski,  and  to  Melbourne  S.  Moyer,  C.  P.  A., 
sometime  lecturers  in  that  institution. 

CLINTON  COLLVER 
34  Pine  Street,  New  York. 


Table  of  Content* 

INTRODUCTION: 

I.  Preliminary  Statement 1 

II.  Policy  of  Publicity 5 

III.  Industrials  Compared  with  Railroads 9 

IV.  Magnitude  and  Varieties  of  Industrials 13 

V.  Advantages  of  Large  Scale  Enterprise 17 

BUSINESS  FACTORS: 

VI.  Fluctuations  in  Demand 21 

VII.  Diversification 25 

VIII.  Integration— Source  of  Supplies 31 

IX.  Standardization  and  Location 37 

X.  Competition 41 

MANAGEMENT: 

XI.  The  Personal  Equation 47 

XII.  Co-operation  and  Loyalty 55 

XIII.  Financial  Control — Alliances 57 

XIV.  Financial  Policy 61 

BALANCE  SHEET — DEBIT: 

XV.  Lack  of  Uniformity 69 

XVI.  Certificates  of  Public  Accountants 71 

XVII.  Complete  Balance  Sheet 75 

XVIII.  Fixed  or  Capital  Assets 81 

XIX.  Permanent  Investments 93 

XX.  Treasury  Stocks  and  Bonds 97 

XXI.  Goodwill  and  Organization 9* 

XXII.  Patents,  Trademarks,  Brands,  Rights 103 

XXIII.  Working  and  Trading  Assets 109 

XXIV.  Current  Assets 115 

XXV.  SinkingFunds 119 

XXVI.  Deferred  Assets 123 

BALANCE  SHEET — CREDIT: 

XXVII.  Bond  Limitation 127 

XXVIII.  Preferred  and  Common  Stocks 137 

XXIX.  Changing  Capitalization  Form  143 

XXX.  Current  Liabilities 147 

XXXI.  Working  Capital 153 

XXXII.  Reserves 157 

XXXIII.  Surplus 159 

XXXIV.  Book  Value ....  .161 


Table  of  Contents— continue 

PAGES 

INCOME  FACTORS  : 

XXXV.  The  Income  Account 165 

XXXVI.  Consistent  Form  Necessary 167 

XXXVII.  Gross  Sales 171 

XXXVIII.  Gross  and  Net  Profits 175 

XXXIX.  Other  Income 179 

XL.  Total  or  Gross  Income 179 

XLI.  Interest 183 

XLII.  Profit  and  Loss— Surplus 185 

XLIII.  Margin  of  Safety— Average  Profits 187 


New    Promotions 189 

Federal  Trade  Commission  Query , 205 

Index  .  .  209 


INTRODUCTION 


Preliminary  Statement 

IN  order  to  analyze  securities  of  any  kind  it  is  essen- 
tial that  complete  and  frequent  reports  of  earnings 
and  reliable  figures  as  to  financial  condition  be  avail- 
able.    Without  light  we  are  in  the  dark  and  darkness 
in  the  financial  world  is  the  moral  breach  of  trust  of  the 
use  of  "inside  information"  possessed  by  the  few — and 
the  hopeless  gambling  of  uninformed  outsiders. 

It  is  true  that  some  industrial  corporations  do  not  report 
their  earnings  or  their  true  financial  affairs  with  the 
promptness  and  fidelity  to  truth  which  characterizes  such 
companies  as  the  Pennsylvania  Railroad.  Yet  there  are 
railroads  whose  statements  have  been  found  in  gross  error, 
and  now  many  Pennsylvanias  exist  among  the  industrials. 
Investment  is  the  placement  of  funds  for  safety  of 
principal  and  surety  of  interest  return;  speculation  is 
defined  as  the  intelligent  attempt  to  discount  the  future; 
gambling  as  the  staking  of  money  on  blind  chance.  It  is 
therefore  clear  that  investment  and  speculation  are  not 
possible  unless  full  and  frequent  reports  of  earnings  and 
reliable  statements  of  financial  condition  are  given.  If 
certain  industrial  corporation  directors  have  not  yet  dis- 
covered that  the  dishonor  of  breach  of  trust  is  outgrown, 
the  public  can  assist  in  the  awakening  and  incidentally 
preserve  its  hard-earned  dollars  by  directing  its  attention 

(i) 


2  How  to  Analyze  Industrial  Securities 

to  companies  issuing  more  reliable  and  more  frequent  in- 
formation arid  which  are  managed  for  the  benefit  of  the 
stockholders  as  a  whole. 

A  new  doctrine,  a  new  standard  of  publicity  and  con- 
scientious responsibility  has  arrived  and  with  it  a  more 
friendly  attitude  of  the  public  mind  toward  industrial 
corporations.  The  increased  demands  for  publicity  on  the 
part  of  stockholders,  more  nearly  approaching  the  close 
responsibility  demanded  by  English  stockholders,  the  de- 
mands of  Government  officials  for  more  uniform  reports 
and  the  well-defined  increase  in  moral  responsibility  of 
directors  of  industrial  corporations  results  in  information 
admitting  intelligent  analysis  of  industrial  corporation 
securities. 

Also,  through  the  years  have  come  the  results  of  ex- 
perience— of  good  and  bad  experience ;  better  methods  in 
promotion  and  capitalization.  Mistakes  and  weaknesses 
of  the  older  corporations  have  been  either  largely  out- 
grown or  pruned  in  drastic  reorganization.  Latter  day 
reorganizations,  forced  by  weak  methods  or  gross  errors 
in  management,  have  been  accomplished  to  meet  the 
conditions  of  poor  times,  so  that  the  approach  of  pros- 
perity brings  almost  certain  and  large  profits.  In  the 
light  of  innumerable  previous  reorganizations  errors  and 
weaknesses  have  been  eliminated  which  in  former  years 
would  have  existed  even  after  reorganization. 

It  has  been  said  that  a  brick  could  not  be  thrown 
away  in  the  Carnegie  Steel  Company's  plants  without  its 
principal  owner  being  forthwith  apprised  of  the  fact 
through  its  accounting  department.  Mr.  Carnegie  was 


Preliminary  Statement 


one  of  the  first  business  men  in  control  of  large  industry 
to  realize  the  importance  of  properly  kept  books  of  ac- 
count and  to  use  them  in  formulating  plans  of  action. 

To  the  advance  in  accounting  work  a  generous  part  of 
the  advance  in  corporation  management  must  be  cred- 
ited. Officials  now  know  facts  that  their  predecessors 
blindly  guessed  at;  they  have  day  by  day  related  facts, 
figures  and  graphs  essential  to  the  conduct  of  modern  busi- 
ness that  managers  of  only  yesterday  knew  nothing  about. 
Accurate  knowledge  of  costs  of  production  is  only  one 
of  the  results  of  modern  accounting  methods  that  were 
not  available  when  large  industrial  enterprise  originated. 

Managers  generally  now  take  a  long  range  view  of 
corporation  finance.  Strength  of  treasury,  upkeep  of 
property,  improvements  of  methods  and  expansion  of 
activities  and  of  markets  appear  more  important  than 
exhibitions  of  inflated  income  accounts  and  balance  sheets, 
brightly  colored  in  order  to  declare  unearned  dividends 
and  thereby  to  cultivate  artificially  the  growth  of  security 
prices. 

More  intelligent  and  advanced  methods  in  competition 
prevail  at  the  present  time  than  formerly.  Instead  of 
relentless  competition,  usually  destructive  to  all  con- 
cerned, a  spirit  of  helpful  co-operation  now  generally 
exists  among  industrial  enterprises  of  any  size.  In  the 
suits  of  the  Government  against  the  United  States  Steel 
Corporation  and  the  International  Harvester  Company 
no  competitor  could  be  found  who  was  not  their  friend. 

Associations  of  active  competitors  have  eliminated  in- 
numerable trade  abuses  and  testify  to  the  new  doctrine 


4  How  to  Analyze  Industrial  Securities 

that  in  the  unlimited  trade  possibilities  of  the  world  the 
prosperity  of  one  depends  upon  the  prosperity  of  all.  In 
the  Railway  Business  Association,  for  example,  are  over 
four  thousand  firms  and  corporations  manufacturing  rail- 
way supplies  and  equipment.  The  Wool  Association  ties 
together  great  and  small  factors  in  the  wool  trade. 
Almost  immediately  upon  its  birth  the  association  erad- 
icated flagrant  trade  practices  which  had  persisted  for 
generations. 

One  of  the  most  striking  economic  developments  re- 
sulting from  the  world  war  has  been  the  improved 
position  of  labor  and  the  tendency  of  capital  and  labor 
to  regard  each  other  as  partners.  It  has  been  well  put 
recently  by  a  well-known  capitalist  that  "Labor  and  Capi- 
tal should  both  have  a  fair  wage.  The  surplus  should  be 
divided." 

It  is  not  surprising  that  there  is  less  opposition  to  big 
business  to-day  than  at  any  time  since  the  possible  evils 
of  trust  operation  were  first  recognized. 


II 

Policy  of  Publicity 

THE  contention  against  publicity  most  frequently 
offered  by  corporations  is  that  it  would  injure 
them  to  publish  reports  which  would  inform  their 
competitors  of  the  progress  of  their  business  and  profits. 
But  if  all  corporations  should  agree  to  issue  such  reports 
any  drawback  from  this  source  would  cease.  The  ad- 
vantage to  be  gained  from  the  knowledge  would  be  gen- 
eral. At  its  best,  this  policy  of  concealment  is  a  narrow 
one,  abandoned  by  progressive  corporations  in  every  line, 
and  it  is  doubtful  if  many  of  those  who  put  the  argu- 
ment forward  believe  in  it. 

That  policies  of  publicity  adopted  by  various  large  cor- 
porations are  varied  is  not  surprising,  since  any  policy 
of  adequate  publicity  is  not  yet  universal;  the  old  and 
obsolescent  "information  for  insiders  only"  still  prevails 
in  certain  corporations.  However,  many  important  cor- 
porations make  sincere  attempts  at  publicity.  Representa- 
tive examples  are  as  follows: 

Sears,  Roebuck  &  Company  and  the  F.  W.  Woolworth 
Company  give  their  total  monthly  sales  each  month.  This 
is  good,  as  far  as  the  information  goes;  it  leaves  much 
to  be  imagined  as  to  net  profits. 

The  American  Hide  &  Leather  Company  gives  net 


6  How  to  Analyze  Industrial  Securities 

earnings  each  quarter  in  cumulative  form,  i.  e.,  three, 
six,  nine,  twelve  months,  together  with  a  statement  show- 
ing current  assets. 

The  American  Steel  Foundries  Company  gives  quar- 
terly reports. 

The  Lackawanna  Steel  Company  gives  quarterly  in- 
come each  quarter,  also  earnings  in  cumulative  form  and 
record  of  unfilled  tonnage  orders. 

The  General  Chemical  and  Corn  Products  companies 
give  earning  statements  each  quarter  in  cumulative  form. 

The  United  States  Steel  Corporation's  quarterly  re- 
ports show  earnings  by  months.  Since  1911  the  gross 
sales  to  customers  have  been  separated  from  sales  be- 
tween subsidiary  companies.  On  the  tenth  of  each  month 
a  report  of  unfilled  orders  on  hand  is  issued,  which,  taken 
in  connection  with  the  activity  of  plants  and  the  prices 
of  steel  and  iron,  give  a  reasonable  line  on  current  earn- 
ings monthly. 

The  United  States  Rubber  Company  gives  semi-an- 
nual reports  of  earnings.  Quarterly  reports  were  given 
out  at  one  time  but  were  abandoned,  the  company  assert- 
ing that  rubber  earnings  were  so  variable  because  of 
seasonal  influences  that  quarterly  reports  were  mislead- 
ing. 


Policy  of  Publicity 


All  companies  whose  stocks  are  now  listed  on  the  New 
York  Stock  Exchange  must  publish  at  least  once  a  year 
and  submit  to  stockholders  at  least  fifteen  days  in  ad- 
vance of  the  annual  meeting  a  statement  of  their  phys- 
ical and  financial  condition,  consisting  of  a  consolidated 
income  account  concerning  the  previous  fiscal  year  and  a 
consolidated  balance  sheet  showing  assets  and  liabilities 
at  the  end  of  the  year.  The  exchange  authorities  are 
making  efforts  to  insure  publication  of  these  reports  in- 
side of  the  fifteen  days'  limit,  also  to  secure  the  volun- 
tary publication  of  quarterly  or  semi-annual  reports  in 
addition  to  the  compulsory  annual  reports. 

It  is  now  widely  recognized  that  quarterly  if  not 
monthly  reports,  at  least  of  earnings,  can  be  prepared  by 
corporations  in  most  lines  of  business,  and  necessary  for 
the  protection  of  the  public.  Certainly  the  management 
of  few  companies  remains  in  the  dark  to  developments 
until  the  annual  statements  are  made  up.  Why  should 
the  management  (and  directorate)  have  the  enormous  ad- 
vantage of  information  months  fresher  than  that  given 
to  the  ordinary  partner-stockholder? 


Ill 

Industrials  Compared  With  Railroads 

METHODS  of  analysis  of  railway  securities  have 
been  well  publicized.  In  the  search  for  methods 
of  analyzing  and  judging  industrial  securities  the 
essential  differences  between  railroad  and  industrial  se- 
curities are  worth  considering. 

1.  As  to  stability  of  earnings:  The  advantage  is  surely 
on  the  side  of  the  railroads,  although  certain  chain  store 
corporations  and  packing  companies  exhibit  earnings  of  a 
consistency  to  make  the  best  railroad  organization  en- 
vious. 

The  margin  of  earnings  over  interest  charges  is  usually 
much  smaller,  especially  in  times  of  prosperity,  for  the 
railroads  which  cannot  raise  rates  as  the  demand  for  their 
service  increases.  Industrials  not  only  enjoy  better  busi- 
ness in  prosperity  but  greater  business  at  greater  margins 
of  profit.  In  depression,  railroads  cannot  store  their  ser- 
vice as  can  industrials  their  products,  nor  can  they  dump 
their  service  abroad  as  can  the  industrials  their  output. 
In  prosperous  times  railroads  have  to  spend  more  for 
materials,  wages,  etc.,  and  net  earnings  may  actually  de- 
crease as  business  becomes  too  great  to  handle  with  econ- 
omy. In  times  of  depression,  materials  and  wages  are 
lower  in  cost.  In  but  few  railroad  systems  can  such  ex- 
penditures be  cut  to  offset  the  decrease  in  traffic.  Yet 

(9) 


10  How  to  Analyze  Industrial  Securities 

depression  in  rail  earnings  does  not  as  a  rule  compare 
in  depth  with  the  depression  experienced  in  specific  in- 
dustrial corporations. 

2.  Elasticity.     Industrial  corporations  can  more  easily 
increase  the  capacity  of  their  plants  or  buy  other  plants 
to  supplement  their  output.     The  railroad  is  fixed.     In- 
crease in  capacity  beyond  the  normal  is  most  difficult. 

3.  Possible  failure  in  demand  for  products  of  indus- 
trial corporations.    The  services  of  railroads  are  always 
necessary.    A  bankrupt  railroad  is  almost  never  torn  up. 
It  is  reorganized  and  operation   does  not  cease.     The 
country   is   dotted  with  empty   industrial  plants  whose 
products  are  no  longer  marketable. 

4.  Lack  of  standardization  of  activities  and  methods. 
Railroad  operation  is  a  science.    Methods  are  practically 
identical  from  one  end  of  the  country  to  the  other,  so  that 
employes  and  officials  are  almost  interchangeable.     In- 
dustrial operations  are  as  many  as  the  variations  of  all 
industry — variations    almost    infinite    in    number,    from 
building  of  battleships  to  producing  a  moving  picture 
film.     Even  so,  the  advantage  of  accounting  and  cost 
keeping,  methods  of  sales  and  of  advertising  generally, 
are  bringing  the  principles  of  operation  of  the  various 
classes  of  industrial  corporations  into  closer  relationship. 

5.  Large  possibility  of  expansion  of  industrial  earnings 
through  diversification  of  products  and  expansion  of  mar- 
kets.   Railroad  business  is  more  limited  to  the  shipments 
of  agricultural  products   or  industries  in  the  territory 
adjacent  to  it.    New  and  profitable  traffic  arrangements 
can  be  made,  but  usually  the  field  for  such  action  is  lim- 


Industrials  Compared  With  Railroads  11 

ited.    The  possibilities  of  expansion  of  industrial  organi- 
zation are  almost  without  limit. 

6.  Difference  in  business  and  financial  structure  and 
financial  method.  Fixed  property  such  as  rail  and  right 
of  way,  equipment,  stations,  etc.,  usually  form  from  95 
per  cent,  up  of  railroad  assets.  Business  being  more 
stable  and  dependable,  railroads  finance  themselves  more 
generally  with  borrowed  funds  and,  since  their  business 
is  practically  on  a  cash  basis,  need  little  actual  bank  bal- 
ance. From  50  per  cent,  upward  of  the  property  of  in- 
dustrial corporations  is,  or  should  be,  in  trading  and 
current  assets  as  a  rule.  Industrials  usually  have  the 
more  simple  corporate  organization.  Many  railroads 
control  subsidiaries  through  lease  or  guarantees,  condi- 
tions not  usual  among  industrials.  Securities  of  rail- 
roads are  issued  in  divers  forms  from  debentures  to 
terminal  mortgages.  Industrial  capitalization  is  usually 
very  simple. 


IV 
Magnitude  and  Varieties  of  Industrials 

CENSUS  figures  show  an  increase  in  the  value  of 
manufactured    products    from    $5,369,579,000    in 
1879  to   $24,246,434,724  for  1914,  with  an  advance 
.  in  capital  invested  from  $2,790,273,000  to  $22,790,979,- 
937.    This  growth  naturally  reflects  in  increased  interest 
in  industrial  securities.     The  amount  of  business  done 
by  the  largest  industrials  compares  favorably  with  the 
receipts  of  the  greatest  railroad  systems. 

The  census  statement  below,  the  last  available,  shows 
statistics  for  manufacturing,  excluding  building  trades 
and  hand  trades,  as  compared  with  figures  for  1909. 

FINAL  FIGURES 


Number   Establishments 
Number     Persons     En- 
gaged,  Average   Dur- 
ing Year  

1914 
275,791 

8  263  153 

1909 
268,491 

7  678  578 

%  In- 
crease 
2.7 

7  6 

Primary  Horsep'r  Used 
Capital  Owned  and  Bor- 
rowed . 

22,547,574 
$22  790  979  937 

18,675,376 
$18  428  269  706 

20.7 
23  7 

Salaries   

1287916951 

938  574  967 

37  2 

Wages  

4,078  332  433 

3  427  037  884 

19  0 

Services    (total)  

5  366  249  384 

4  365  612  851 

22  9 

Materials  

14,368  088  831 

12  142  790  878 

18  3 

Value  of  Products  
Value  added  by  Manu- 
facturing —  value    of 
products  less  cost  of 
Material  .. 

24,246,434,724 
9.878.345.893 

20,672,051,870 
8.529.260.992 

17.3 

15.8 

(13) 


14  How  to  Analyze  Industrial  Securities 

As  1909  was  a  year  of  general  prosperity  and  1914 
one  of  unusual  depression,  the  later  figures  do  not  show 
the  marked  increase  that  more  normal  years  would  have 
indicated. 

The  kind  of  industrial  corporations  may  be  roughly 
given  as  follows : 

Manufacturing. 

(a)  Iron  and  steel  and  finished  products,  such  as  au- 
tomobiles,  farming  machinery,  pumps,  elevators,  radia- 
tors, boats,  ships,  tin   and  detinning  processes,  bridges, 
factory  and  office  machinery,  household  appliances. 

(b)  Electrical  apparatus. 

(c)  Railway  equipment  manufacture. 

(d)  Rubber  tires,  shoes,  clothing,  hose. 

(e)  Smelting  and  refining,  cement,  brick. 

(f)  Agricultural    and    miscellaneous    products,    flour, 
brewery   and   distillery   products,   meat,   biscuit,    sugar, 
fruit,  cotton  oil,  tobacco,  paper,  match,  shoes,   leather, 
gum,    drugs,    chemicals,    fertilizers,    moving    pictures, 
phonographs,  powder  and  ammunition. 

(g)  Publishing  and  educational. 
Distributing  and  trading: 

(a)  Department   stores,   cigar  stores,    5   and    10-cent 
stores,  mail  order  houses,  profit  sharing. 

(b)  Cotton  and  woolen  goods.     Clothing. 
Construction. 

It  will  be  noticed  that  mining  companies  are  not  in- 
cluded, because  the  principles  of  mining  are  entirely 
at  variance  with  the  principles  of  other  business  and 


Magnitude  and  Varieties  of  Industrials          15 

analysis  of  their  securities  must  be  made  by  materially 
different  methods. 

Corporations,  e.  g.,  steel  companies,  whose  mining  op- 
erations are  only  a  part  of  their  business,  are  included. 


v 

Advantages  of  Large  Scale  Enterprises 

THE  story  of  large  scale  enterprise  is  that  of 
business  dependent  on  rapid  mails,  railroads, 
steamships,  telephone  and  telegraph.  Without 
these  agencies  amalgamations  of  manufacture  and  dis- 
tribution would  not  be  feasible.  The  control  and  operation 
of  widely  separated  plants  or  distributing  agencies  de- 
pends directly  upon  these  better  transportation  and  com- 
munication facilities.  Had  modern  transportation  and 
communication  facilities  existed  earlier,  large  scale  enter- 
prise would  have  started  earlier.  Under  the  present  sys- 
tem of  specialized  economic  life  large  scale  enterprise  is 
a  necessity.  Its  advantages  have  proved  as  follows : 

1.  Ease  of  financing.     Large  corporations  have  access 
to  the  capital  reservoirs  of  the  entire  country  and  in 
normal  times  to  capital  from  the  whole  world  at  low 
rates.     Small  corporations  are  limited  to  capital   from 
the  few  directly  concerned  and  from  local  banks  whose 
rates  are  high  and  whose  financial  strength  may  not  al- 
ways be   sufficient    for  normal   needs,   not  to  consider 
expansion.     Smaller  corporations   do  not  pay,   from  a 
standpoint  of  financiers,  who  will  handle  small  issues  of 
securities,  if  at  all,  only  for  exorbitant  charges. 

2.  Location.     Small  businesses  many  times  seem  to 

(17) 


18  How  to  Analyze  Industrial  Securities 

happen  as  far  as  locality  is  concerned.  Large  business 
enterprise  is  able,  because  of  its  financial  strength,  to 
choose  locations  nearer  the  market  for  its  products  or 
the  source  of  raw  material,  as  seems  best,  gradually 
closing  those  plants  or  distributing  agencies  not  well 
situated  from  the  economic  standpoint.  The  closing  of 
plants  of  the  Steel  Corporation  and  of  the  Corn  Products 
Company  are  examples.  Especially  well  located  smaller 
corporations  may  not  suffer  in  this  comparison  as  do 
isolated  plants  not  well  located,  but  even  the  best  of 
small  corporations  suffer  in  competition  with  a  corpora- 
tion which  has  plants  and  distributing  agencies  in  all 
parts  of  the  country.  This  is  especially  important  when 
freight  is  a  large  item,  as,  for  example,  in  iron,  steel 
and  cement.  Corporations  whose  activities  are  wide- 
spread, for  instance,  chain  stores,  have  the  advantage  of 
operating  in  communities  with  varied  interests.  General 
business  may  be  poor  in  some  of  the  cities  operated  in,  but 
good  in  others,  excellent  in  still  others.  A  corporation 
operating  in  only  one  community  finds  business  more  or 
less  influenced  by  the  condition  of  business  in  that  one 
community. 

3.  Advantages  in  advertising.     Large  corporations  are 
best  able  to  conduct  national  advertising  campaigns. 

4.  Large  scale  plants  are  possible,  using  improved  and 
economical  methods  of  production. 

5.  Large  scale  production  and  distribution  admit   of 
purchasing  in  large  quantities  at  consequent  lower  cost. 
With    stronger    financial    resources    larger   corporations 
are  able  to  buy  at  favorable  times  to  supply  future  re- 


Advantages  of  Large  Scale  Enterprises          19 

quirements.  In  some  industries  corporations  control  the 
production  of  the  raw  materials  and  every  stage  of 
manufacture  to  delivery  of  the  most  finished  products, 
as,  for  example,  the  United  States  Rubber  Company. 

6.  Large  corporations  are  able  to  avail  themselves  of 
the  highest  priced  brains  of  the  country  in  manufactur- 
ing and  distribution,  and  yet  are  less  dependent  on  the 
life  or  ability  of  any  one  man.     Standards  of  produc- 
tion rate  and  of  costs  are  possible.     Comparative  state- 
ments  furnished  at   frequent   intervals   by  the   various 
plants  or  branches  furnish  a  constant  incentive  to  super- 
intendents and  managers.     Such  results  are  difficult  of 
attainment  in  small  corporations  because  the  practices 
and  costs  of  each  corporation  are  usually  guarded.     In 
larger  corporations  each  part  is  given  the  advantages  of 
the  best  practices  of  the  others.    Large  corporations  are 
best  able  to  carry  on  expensive  but  ultimately  profitable 
experimental  and  development  work. 

7.  Large    corporations    have   the   capital    with    which 
to  develop  foreign  trade.     Small  enterprises  could  not 
develop  the  foreign  field  as  the  Singer  Sewing  Machine 
Company,  the  International  Harvester  Corporation  and 
the  United  States  Steel  Corporation  have  done. 

8.  Corporations   producing  large   quantities   are    able 
to  make  the  best  use  of  waste  or  by-products.    The  con- 
ventional example  is  that  of  fertilizer,  horn,  gelatine, 
glue    and   other   products    of   the   large   meat   packing 
plants;    various    waste    manufactures    of  tobacco  com- 
panies are  even  more  profitable. 

9.  A  corporation  having  several  plants  is  not  likely 


20  How  to  Analyze  Industrial  Securities 

to  be  crippled  by  fire  or  flood  or  strikes.  The  large 
corporation  is  less  apt  to  be  embarrassed  by  losses  from 
personal  accident  suits. 

10.  In  many  industrial  lines  a  large  corporation,  for 
example  a  rubber  manufacturing  concern,  is  able  to  pro- 
duce a  great  variety  of  articles,  so  that  the  average  de- 
mand is  usually  more  dependable  than  in  the  case  of  a 
company  having  only  one  or  a  limited  number  of  articles. 


PART  II 
BUSINESS  FACTORS 


VI 

Fluctuations  in  Demand 

GOOD  business  will  hide  many  sins.  Sins  of  pro- 
motion, of  organization,  capitalization,  manipu- 
lation and  management  are  well  concealed  behind 
the  skirts  of  constantly  increasing  sales.  As  with  Rufus 
Wallingford's  colored  carpet  tack  industry,  good  busi- 
ness may  even  reform  the  sinner.  Business  may  be  so 
good  that  decency  is  obviously  the  best  policy  to  the 
most  morally  blunted.  Consider  the  treatment  of  a 
certain  railroad  and  of  a  certain  tinplate  product  com- 
pany, both  controlled  by  the  same  hand.  Business  has 
been  good  with  the  industrial  corporation. 

Will  the  sales  keep  up — not  only  keep  up,  but  con- 
sistently expand? — should  be  the  security  holders'  first 
mental  inquiry.  Is  the  business  a  necessity  like  meat, 
bread,  biscuit,  oil,  or  cheap  automobiles?  Is  its  prod- 
uct in  daily  use  satisfying  a  great,  broad,  growing  de- 
mand? Does  it,  like  the  five  and  ten-cent  stores,  "sell 
to  all  classes  of  people  small  things  which  go  to  make 
up  everyday  life,  and  does  it  sell  a  large  volume  of  these 
goods  with  the  small  margin  of  profit?"  If  it  does,  thrift- 
preserving  and  fortune-making  possibilities  are  plainly 
indicated.  Take,  for  example,  the  business  of  the  F.  W. 
Wool  worth  and  the  S.  S.  Kresge  Companies.  Sales 

(21) 


22  How  to  Analyze  Industrial  Securities 

have  constantly  increased  year  after  year.  Even  during 
the  panic  years  1907-1908  the  sales  of  the  F.  W.  Wool- 
worth  Company  maintained  a  satisfactory  increase. 

Is  the  business  one  which  fluctuates  by  season? 
Is  it  like  the  ice  and  chewing  gum  business,  blessed  by 
a  sweltering  summer  and  cursed  by  seasonable  temper- 
atures? Does  it,  like  the  rubber  shoe  business,  depend 
upon  thick  slush  and  thick  slush  only  for  cheering  sales 
reports?  Is  it  a  business  like  railway  equipment  or 
building  construction,  whose  activities  are  intensified 
business  barometers?  Is  it  like  the  upper  leather  in- 
dustry ?  In  good  times  people  buy  shoes  to  throw  away ; 
in  poor  they  have  their  old  shoes  patched.  Is  it  like 
steel,  that  best  recognized  prince  or  pauper  industry? 

Some  time  ago  a  sand  and  gravel  company  issued 
securities  capitalizing  its  business  on  a  basis  of  cur- 
rent profits.  It  happens  that  the  city  in  which  this 
corporation  operates  had  not  only  been  largely  rebuilt 
within  the  past  few  years  because  of  a  fire,  but  a 
large  sewer  system  demanding  immense  quantities  of 
sand  and  gravel  had  just  been  completed.  Is  not 
close  consideration  of  future  possibilities  in  such  a 
case  essential? 

Consider  carefully  changes  in  demand.  Remember 
the  fate  of  the  original  American-La  France  Fire  En- 
gine Company,  manufacturing  horse-drawn  equipment 
when  the  world  demanded  the  strongest  gasoline-pro- 
pelled apparatus.  Consider  the  Michigan  Buggy  Com- 
pany, offering  a  splendid  automobile  about  five  years  too 
late. 


Fluctuations  in  Demand  23 

Do  style  or  fad  control  the  gross  receipts?  If  so, 
style  or  fad  is  the  thing,  and  a  gamble.  During  the  bit- 
terest times  the  wool  industry  has  known  in  genera- 
tions the  manufacturers  of  pony  fabrics  for  women's 
coats  worked  twenty- four  hours  a  day  and  longed  for 
more  hours.  Now  how  many  pony  coats  do  you  see? 
No  manufacturer  of  any  article  depending  on  style  or 
fad  can  expect  to  have  a  dependable  business.  Remem- 
ber bicycling.  Two  well-attested  remedies  exist  to 
counteract  the  usual  tendency  of  an  industrial  organiza- 
tion to  suffer  first  from  starvation  and  next  from  over- 
eating: Diversification  of  product  and  careful  conserva- 
tion of  earnings.  Prominent  examples  of  the  efficacy 
of  these  remedies,  if  taken  simultaneously,  are  the  Gen- 
eral Electric  Company  and  the  Western  Electric  Com- 


VII 

Diversification 

EDK  at  the  activities  of  the  American  Can  Com- 
pany. It  makes  more  than  43,000  different  kinds 
of  cans  or  containers.  Besides  the  ordinary  tin 
cans  for  food  products,  talcum  powder,  tobacco,  soap, 
soup,  meats,  etc.,  the  company  makes  the  following  arti- 
cles: Adding  machines,  banks,  bread-boxes,  coffee-mill 
hoppers,  confectioners'  novelties,  corrugated  ware,  cotton 
tags,  first-aid  kits,  fiber  boxes,  paper  boxes,  fumigators, 
ice-cream  freezers,  insect-powder  guns,  japanned  tinware, 
lead  kegs,  orchard  heaters,  display  signs,  paint  strainers, 
peanut  roasters,  turpentine  cups,  fly  traps,  tin  or  sheet- 
metal  stoves,  signs,  tinware,  ash  and  garbage  cans,  oil 
cans,  shipping  cases  of  fiber,  auto  tanks,  oil  tanks,  etc. 
One  large  factory  at  Joliet,  111.,  runs  exclusively  on 
fiber  and  other  shipping  cases  and  boxes.  Two  factories 
run  exclusively  on  tinware  and  all  kinds  of  tin  and  sheet- 
metal  products  not  to  be  sealed. 

Suppose  the  American  Can  Company  depended  for 
its  sales  on  the  salmon  packing  industry,  one  of  its 
largest  customers.  Salmon  run  in  four-year  cycles. 
After  the  big  year  there  is  a  sharp  drop  for  two  succeed- 
ing years,  then  a  large  increase  and  then  a  phenomenal 
run.  This  is  due  to  the  habits  of  the  fish,  for  which  no 
adequate  explanation  has  been  advanced. 

(25) 


26  How  to  Analyze  Industrial  Securities 

Suppose  the  corn  packing  industry  formed  the  sole 
demand  for  the  products  of  the  American  Can  Com- 
pany. Green  corn  was  only  half  a  pack  in  1913.  How- 
ever, in  1914  the  green  corn  pack  was  large,  counter- 
acting a  small  salmon  pack. 

With  its  many  thousands  of  products,  so  many  of 
them  of  widely  diversified  use,  it  is  easy  to  understand 
that  the  business  of  the  American  Can  Company  is  de- 
pendable. It  is  not  surprising  that  after  the  year  1911 
the  president  was  able  to  report  to  the  stockholders  that, 
although  the  year  had  been  an  unfortunate  one  in  many 
lines  of  industry,  the  business  of  the  American  Can  Com- 
pany had  been  entirely  satisfactory. 

The  rapid  strides  of  the  Republic  Iron  &  Steel  Com- 
pany are  largely  traceable  to  a  careful  diversification  of 
product.  This  company  seven  or  eight  years  ago  was 
essentially  an  iron  company.  Under  the  chairmanship 
of  J.  A.  Topping  the  mills  have  been  transformed  into 
plants  making  many  forms  of  steel,  and  this  has  been 
done  without  fatally  disturbing  its  original  business. 
Moreover,  the  company  manufactures  profitable  by- 
products, such  as  benzol  and  toluol.  This  careful  di- 
versification has  made  the  Republic  Steel  Company  one 
of  the  strongest  in  the  industry. 

The  Lackawanna  Steel  Company  was  essentially  a 
rail  and  rail-fittings  corporation,  although  it  did  pro- 
duce plates,  structural  steel  and  bars,  and  billets, 
blooms  and  pig  iron.  The  demand  for  rails,  like  that 
of  all  other  supplies  for  railroads,  greatly  fluctuates, 
and  as  a  result  the  Lackawanna  Company  has  been 


Diversification  27 


violently  injured  in  times  of  depression.  For  example, 
in  1911,  with  a  capacity  of  600,000  tons  a  year,  its 
rail  production  was  less  than  226,000  tons.  In  that 
year  the  profits  per  ton  of  steel  sold  were  11  cents  a 
ton.  While  not  yet  manufacturing  light  finished  prod- 
ucts, commanding  high  prices,  the  company  has  con- 
stantly increased  its  lines,  as  well  as  extended  the 
shapes,  sizes  and  uses  of  the  old.  Contractors'  supplies, 
such  as  a  branded  sheet  piling;  reinforcing  bars  and 
general  structural  fabricating  are  now  manufactured. 
From  every  angle  the  company  is  better  prepared  than 
ever  before  for  any  period  of  general  depression. 

The  Prest-O-Lite  Company  is  one  of  the  many  com- 
panies whose  existence  has  been  maintained  by  wise 
diversification  of  the  use  of  its  products.  Its  gas  tanks 
were  almost  universally  used  before  the  advent  of  elec- 
tric lighting  systems  for  automobiles.  The  demand  for 
the  tanks  would  have  dropped  perpendicularly  had  the 
company  not  adapted  its  system  and  product  to  com- 
mercial fields,  for  the  use  of  contractors,  railroads  and 
manufacturers  in  cutting  and  welding  metals.  As  a 
result  of  its  diversification  the  earnings  have  improved 
in  spite  of  the  change  in  automobile  practice. 

The  United  States  Rubber  Company's  earnings  have 
been  maintained  by  taking  up  new  lines.  The  tire  busi- 
ness has  at  different  times  made  up  in  profits  for  de- 
clines in  sales  of  its  older  staple  production.  In  the 
company's  showrooms  in  New  York  are  exhibited  such 
varying  products  as  toys,  bathroom  supplies,  floor  tile, 
mbber  clothing,  belting,  packing,  electrical  insulating 


28 How  to  Analyze  Industrial  Securities 

material,  football  bladders,  boots,  shoes,  arctics,  "rub- 
bers," rubber  heels,  a  new  composition  sole  for  shoes, 
surgical  supplies,  gloves,  rubber  office  bands,  horse- 
shoes, fire  hose,  tires.  Almost  daily,  new  uses  for  rubber 
are  discovered.  Even  fly  swatters  are  now  made  from 
this  essential,  accommodating  material. 

The  American  Cotton  Oil  Company,  through  its  sub- 
sidiary the  N.  K.  Fairbanks  Company,  manufactures 
"Cottolene,"  "Gold  Dust"  and  "Fairy  Soap." 

The  American  Linseed  Oil  Company  has  taken  up 
the  manufacture  of  cocoanut  oil  and  produces  the  cook- 
ing shortening  "Sawtay"  which  is  successfully  invading 
the  grocery  and  delicatessen  field. 

Even  the  Gillette  Safety  Razor  Company,  probably 
looking  ahead  to  the  time  when  its  patent  will  expire, 
has  evolved  a  second  product — an  aluminum  hot-water 
bottle — and  it  would  not  be  surprising  if  other  articles 
were  soon  made  by  this  company. 

The  International  Harvester  Company  is  a  well  known 
example  of  a  company  having  diversified  products.  It 
makes  all  kinds  of  implements  for  agricultural  purposes. 

The  patents  of  the  Crown  Cork  and  Seal  Company 
on  bottle  cap  machines  and  supplies  have  been  expir- 
ing. The  company  has  aggressively  pushed  a  milk 
bottle  seal,  and  a  seal  for  food  containers.  The  com- 
pany has  also  worked  up  a  large  business  in  litho- 
graphed metal  signs. 

The  Diamond  Match  Company,  besides  manufactur- 
ing matches,  is  engaged  in  manufacturing  match-making 
machinery  and  in  all  sorts  of  lumber  products.  It  has 


Diversification  29 


a  paper-board  mill,  block  and  shook  factories,  planing 
mills,  box,  sash,  door,  blind  and  veneer  factories,  and 
even  conducts  retail  lumber  yards. 

A  combination  of  the  ice  and  coal  business  has  long 
been  recognized  as  a  profitable  one,  not  only  to  keep  a 
reliable  working  force  together  at  all  times,  trucks  and 
working  capital  busy  at  different  seasons,  but  also  to 
equalize  earnings.  Abnormalities  of  seasons  tend  to 
equalize  over  a  series  of  years,  and  a  combination  of  ice 
and  coal  business  will  tend  to  have  much  more  depend- 
able earnings  than  either  business  alone. 

The  United  Cigar  Stores  Company  has  sucessfully 
introduced  soda  fountains  in  many  of  its  stores,  par- 
ticularly in  the  South.  In  competition  with  nearby  stores 
it  sells  stationery  and  periodicals  in  some  sections.  Its 
necessity  for  renting  has  developed  a  real  estate  de- 
partment specializing  on  subleases. 


VIII 

Integration — Source  of  Supplies 

ONLY  secondary  in  importance  to  the  demand  for 
the  products  of  a  corporation  is  its  control  over 
permanently  adequate   sources   of   raw   material. 
This  is  a  serious  question  in  many  industries,  such  as 
iron  and  steel,  paper,  matches  and  rubber. 

Companies  controlling  raw  materials  in  all  stages  of 
manufacture  have  a  tremendous  advantage  in  times 
when  raw  materials  are  exceedingly  high  in  cost.  To  be 
sure,  in  times  of  depression  the  advantages  of  integra- 
tion are  not  so  marked,  but  even  then  raw  materials,  such 
as  rubber,  pulpwood  and  iron  ore,  are  seldom  sold  at  a 
loss. 

As  is  well  known,  many  of  the  larger  steel  corpora- 
tions are  thoroughly  integrated.  The  United  States  Steel 
Corporation  and  others  own  or  control  immense  bodies 
of  iron  ore,  coke  and  limestone.  The  Steel  Corporation 
owns  railroad  and  steamship  lines,  controlling  the  prod- 
uct from  the  red  earthy  ore  to  the  finest  of  wire. 

The  International  Harvester  Company,  besides  own- 
ing ore  and  coal,  a  steamer,  blast  furnaces,  a  Bessemer 
mill,  a  blooming  mill  and  merchant  mills  through  the 
Wisconsin  Steel  Company,  controls  large  holdings  of 
timber  in  Missouri  and  Mississippi. 

(31) 


32  H'ow  to  Analyze  Industrial  Securities 

The  United  States  Rubber  Company,  through  a  sub- 
sidiary, has  developed  immense  plantations  of  rubber 
trees  in  Sumatra.  It  now  controls  about  75,000  acres  of 
land,  of  which  approximately  45,000  acres  are  cleared 
and  planted  with  some  5,200,000  trees.  About  3,600,- 
000  were  in  bearing  at  the  end  of  1918.  The  company 
employs  approximately  18,000  natives  and  incidentally 
great  care  is  given  to  their  welfare.  The  investment  so 
far,  has  been  something  over  $9,000,000,  and  the  rub- 
ber plantation  is  by  far  the  largest  under  one  ownership 
in  the  world. 

The  United  Fruit  Company  owns  banana  plantations 
and  railroads  in  Central  America  and  the  West  Indies,  as 
well  as  its  well  known  steamship  lines.  In  its  sugar  di- 
vision it  owns  plantations,  mills  and  a  refinery  at  Boston, 
making  it  the  "only  complete  sugar  process  operated  by 
a  single  combination  of  capital  in  the  world." 

Difficulty  in  securing  dependable  supplies  of  its  prod- 
uct has  led  the  American  Ice  Company  to  build  artifi- 
cial plants  in  principal  markets  and  within  a  short  time 
it  will  probably  gather  or  buy  little  natural  ice. 

There  is  a  limit,  however,  to  the  capital  which  should 
be  tied  up  in  raw  material.  A  corporation  may  be  raw 
material  poor.  For  example,  if  a  corporation  has  too 
much  capital  tied  up  in  iron  ore  deposits  or  coal  mines, 
it  may  not  be  able  to  take  out  and  profitably  use  enough 
of  the  raw  material  to  pay  good  interest  on  the  money 
invested.  In  some  industries — for  example,  wool, 
leather,  cotton  goods,  and  cotton  oil — it  is  not  usually 
practical  to  own  or  operate  the  sources  of  raw  materials. 


Integration — Source  of  Supplies  33 

The  American  Cotton  Oil  Company  could  not  well 
operate  the  immense  cotton  acreage  necessary  for  the 
production  of  the  cottonseed  used.  This  ofttimes  proves 
a  source  of  weakness  to  the  corporation  because  it  finds 
difficulty  in  advancing  the  price  of  its  finished  product 
with  the  advance  in  the  price  of  the  raw  material.  Its 
products  compete  with  those  of  decidedly  dissimilar 
bases,  e.  g.,  lard  and  olive  oil.  In  some  years  the  source 
of  materials  becomes  a  problem  of  gravity  for  the  com- 
pany. Its  president  in  a  report  for  a  recent  year  said 
the  large  cotton  crop  did  not  yield  to  the  oil  mills  a 
proportionately  large  quantity  of  cottonseed,  because  in 
some  sections  considerable  quantities  became  damaged, 
and  a  larger  quantity  than  usual  was  used  for  fertilizer 
and  cattle-feeding  purposes,  being  relatively  cheaper 
than  commercial  fertilizers  or  other  available  foodstuffs. 

Another  corporation  has  necessarily  had  constant 
trouble  in  securing  a  supply  of  raw  materials.  The 
Vulcan  Detinning  Company  buys  scrap  tin,  separates 
the  tin  from  its  base  material  by  electro-chemical  process 
and  sells  the  two  resulting  products  to  steel  manufac- 
turers. The  demand  for  the  products  is  unlimited,  but 
the  company  cannot  buy  up  sufficient  tin  cans  and  other 
scrap  tin  to  utilize  its  capacity. 

A  surprising  development  in  relation  to  raw  material 
took  place  in  the  American  Chicle  Company.  The  re- 
bellions and  revolutions  in  Mexico  resulting  in  destruc- 
tion to  the  company's  plantations  helped  drive  the  stock 
from  over  200  to  a  low  of  34  and  the  dividend  of  one 
and  one-half  per  cent,  a  month  was  entirely  cut  off. 


34  How  to  Analyze  Industrial  Securities 

With  all  the  advantages  which  integration  usually 
brings,  it  is  not  indispensable  where  favorable  arrange- 
ments can  be  made  for  raw  materials,  semi-finished  or 
finished  parts.  The  automobile  industry  presents  an  ex- 
ample. Few  if  any  companies  make  all  the  parts  of  an 
automobile.  Some  150  manufacturers  buy  motors  from 
a  corporation  which  makes  nothing  else,  and  several  of 
the  most  prosperous  automobile  manufacturers  are 
simply  assemblers  of  parts.  One  company  has  recently 
devoted  much  advertising  space  to  an  attempt  to  prove 
that  it  can  offer  best  value  because  it  manufactures 
practically  the  entire  machine.  Figures  are  given  show- 
ing the  profits  saved  on  each  part  ordinarily  purchased 
outside.  These  figures  may  be  perfectly  correct  and 
yet  other  manufacturers  might  offer  at  least  equal  value 
and  buy  a  large  part  of  their  units.  It  might  pay  to 
make  the  units.  It  might  pay  better  to  buy  part  of  them, 
using  capital  in  expansion  of  assembling  plants,  adver- 
tising or  in  purchases  of  raw  material  and  units  at 
favorable  times,  rather  than  tying  up  the  money  in  shops 
requiring  complicated  processes. 

It  would  not  be  practical  for  most  automobile  manu- 
facturers to  manufacture  the  iron  and  steel  of  which 
their  product  is  mostly  composed.  Strange  as  it  may 
seem,  it  would  be  much  more  feasible  for  them  to  enter 
the  aluminum  industry.  An  increase  of  two  or  three 
cents  a  pound  in  steel  is  a  big  advance,  but  is  a  small 
factor  in  the  cost  of  a  car.  An  advance  of  thirty  to 
forty  cents  a  pound  in  aluminum  is  a  serious  matter, 


Integration — Source  of  Supplies  35 

especially  so  because  more  and  more  aluminum  is  being 
used  in  each  car. 

Integration  has  often  been  profitably  accomplished 
by  amalgamation  of  interests — for  example,  a  yarn  com- 
pany with  an  underwear  mill.  At  the  present  time  the 
amalgamation  of  the  complementary  American  Linseed 
Company  and  the  National  Lead  Company  is  widely 
advised.  A  merger  of  the  Tennessee  Copper  Company, 
a  producer  of  sulphuric  acid,  and  The  International 
Agricultural  Chemical  Company  is  suggested  as  a  wise 
move  to  insure  integration  as  well  as  to  reconcile  exist- 
ing conflicting  interests  in  regard  to  contracts. 


IX 

Standardization  and  Location 

IN  certain  industries,  of  which  perhaps  shipbuilding 
and  automobile  making  are  as  prominent  as  any, 
standardization  is  more  necessary  than  integration. 
Until  war  conditions  enforced  standardization  Ameri- 
can shipyards  could  not  compete  with  English  yards. 
One  English  yard  made  only  a  standard  5,000  ton  steam 
vessel,  another  a  10,000  ton  and  so  on,  while  each 
American  yard  built  to  order  many  types  and  sizes. 
England  learned  long  ago  to  turn  out  ships  as  we  turn 
out  automobiles,  with  which  English  makers  could  not 
compete,  even  with  American  cars  selling  higher  in 
England  than  in  America.  American  shoes  outsell  others 
in  the  world  markets  because  in  this  country  factories 
specialize  year  after  year  on  one  type,  men's  high 
grade  or  women's  medium  grade  for  example,  while 
abroad  a  small  factory  will  make  many  styles  in  several 
grades  for  men,  women  arid  children. 

The  plants  of  many  corporations,  like  Topsy,  "simply 
growed."  An  inventor  or  local  capitalist  is  apt  to  pro- 
ceed to  work  out  his  idea  in  marketable  form  with  little 
regard  to  expense  of  bringing  raw  material  or  con- 
venience to  market.  In  some  industries,  such  as  watch- 

(37) 


38  How  to  Analyze  Industrial  Securities 

making,  where  freight  is  of  minor  importance,  the  geo- 
graphic location  of  the  plant  is  of  little  or  no  importance. 
On  the  other  hand,  with  the  Portland  cement  industry,  for 
instance,  location  is  of  first  importance.  Another  example 
is  that  of  fertilizers.  The  Government  estimates  that  not 
less  than  2,500,000,000  tons  of  phosphate  rock  exist  in 
Wyoming,  Utah,  Idaho  and  Montana,  a  supply  so  enor- 
mous as  to  be  practically  inexhaustible.  Much  of  it  is 
of  higher  grade  than  the  Florida  rock,  yet  this  Western 
rock  does  not  compete  at  all  with  the  Southern  product. 
It  is  not  yet  widely  needed  in  the  West  and  the  freight 
from  the  Western  States  to  the  East  is  three  times  the 
worth  of  the  rock  on  the  Atlantic  seaboard.  It  is  evi- 
dent, therefore,  that  as  long  as  the  Eastern  rock  holds 
out,  companies  owning  Western  rock  may  find  little 
market  for  their  wares.  In  the  glucose,  steel  and  auto- 
mobile industries  many  plants  have  had  to  be  closed  be- 
cause of  unfavorable  location. 

The  United  States  Steel  Corporation  has  plants  so 
situated  with  relation  to  raw  materials  and  to  markets 
that  it  successfully  competes  in  all  parts  of  this  country 
except  the  extreme  West  and  New  York  City.  The 
Bethlehem  Steel  Company,  because  of  its  more  favorable 
location  in  reference  to  this  particular  market,  controls 
structural  steel  sales  in  New  York  City. 

Yet  the  possession  of  several  plants  may  prove  a  dis- 
advantage. The  International  Steam  Pump  Company 
found  that  economy  was  impossible  in  the  small  scat- 
tered plants  it  acquired. 


Standardization  and  Location  39 

The  American  Locomotive  Company  found  that  it 
could  build  equipment  most  economically  by  centralizing 
manufacturing  and  erecting.  Therefore,  the  company 
not  long  ago  disposed  of  long-established  plants  in  Rhode 
Island,  New  Jersey,  and  New  Hampshire. 

However,  it  is  evident  that  companies  having  a  country- 
wide market  for  their  wares  whether  they  be  paints  or 
watches,  have  an  advantage  over  corporations  operating 
in  restricted  sections,  because  business  conditions  are 
seldom  uniform.  The  mail  order  houses  and  manu- 
facturers of  automobiles,  as  a  class  for  example,  prosper 
as  does  the  whole  country,  and  are  not  embarrassed  by 
unfortunate  conditions  in  any  one  part  of  the  country. 


Competition 

££  TT  F  conditions  of  extreme  competition  forced  the 
I  inception  of  early  combinations,"  says  Dr.  Arthur 

-*•  S.  Dewing  in  his  'Corporate  Promotions  and 
Reorganizations/  "it  is  equally  true  that  the  attractive- 
ness of  each  one  resulted  from  the  promise  of  the  oppo- 
site extreme,  that  of  monopoly.  Expectations  were  high 
of  materially  increased  prices  and  profits  because  of  the 
elimination  of  competition.  This  was  true  even  in  indus- 
tries where  monopoly  was  impossible — for  example,  in 
leather  and  in  corn  products.  In  fact,  certain  corporations 
which  were  expected  to  monopolize  their  fields  found  that 
every  movement  made  simply  encouraged  competition — 
competition  at  the  hands  of  men  whose  plants  newly 
constructed  were  in  a  better  condition  to  compete  than 
those  of  the  larger  corporations.  The  companies  con- 
trolling the  largest  percentage  of  the  business  in  their 
line  were  the  quickest  to  go  into  the  hands  of  receivers." 
Dr.  Dewing  further  states  that  the  glucose  corporation 
controlled  85  per  cent,  of  the  business  and  the  asphalt 
corporation  80  per  cent,  of  the  business.  Both  were 
stifled  by  competition  within  two  years. 

Dr.  Selwyn-Brown  states  that  the  International  Steam 
Pump  Company  controlled  over  90  per  cent,  of  the  steam 
pump  business.  The  corporation  was  obliged  to  undergo 

(41) 


i2  How  to  Analyze  Industrial  Securities 

drastic  reorganization.  Yet  practical,  profitable  monopoly 
is  possible  only  through  unusual  business  ability;  the 
control  of  a  raw  product  such  as  some  local  brick 
companies,  patents  such  as  those  of  the  Mergenthaler 
Linotype  Company  and  the  Gillette  Razor  Company  or 
the  possession  of  a  trade  mark.  For  years  the  Eastman 
Kodak  Company  retained  a  practical  monoply  in  its  field 
because  of  the  trade  name  it  controls.  Large  profits 
certainly  invite  competition.  Striking  examples  are  the 
phonograph  and  the  motion  picture  fields. 

As  this  country  becomes  more  and  more  devoted  to 
manufacture,  it  is  reasonable  to  expect  that  competition 
will  become  more  keen  and  profits  per  dollar  of  gross 
sales  smaller,  except,  perhaps,  in  certain  instances  during 
times  of  abnormal  prosperity.  Take,  for  example,  the 
field  of  electric  apparatus  and  supplies.  Contrast  the  cost 
of  a  most  improved  six-pound  flatiron — three  dollars — 
with  that  obtaining  a  few  years  ago.  The  General  Elec- 
tric Company  reports  a  constant  narrowing  of  profits  in 
all  lines. 

In  the  past  few  years  the  profits  on  standard  tin  cans 
have  steadily  declined,  even  allowing  for  fluctuation  in 
the  price  of  tinplate  base.  The  American  Company  sells 
cans  at  such  prices  that  no  company  without  facilities 
for  cheap  manufacture  and  an  excellent  selling  organiza- 
ton  can  compete  with  it. 

The  United  States  Rubber  Company  has  constantly 
reported  a  lowering  margin  of  profit,  offset,  of  course, 
as  with  manv  others,  bv  increased  sales. 


Competition  43 


In  the  meat  packing  trade,  profits  per  pound  are  so 
small  that  "our  coinage  does  not  include  a  coin  as  small 
as  the  profit  on  each  pound  of  goods."*  Before  abnormal 
war  conditions,  the  profits  of  Swift  &  Company  were  of- 
ficially stated  to  be  less  than  one  quarter  of  one  cent  per 
pound.  Later  profits  rose,  but  at  2.04  per  cent,  of  the 
turnover,  were  not  over  one-half  cent  per  pound.  In 
some  ways  the  packing  business  has  hopelessly  retro- 
graded. Fifty-five  years  ago  Gustavus  F.  Swift,  the 
founder  of  Swift  &  Company,  began  business  by  selling 
a  $20  heifer  at  a  profit  of  $10.  It  staggers  the  imagina- 
tion to  think  of  what  the  present  colossal  organization 
could  earn  at  this  rate  of  profit. 

Henry  Ford  has  dominated  the  low-priced  automobile 
field  by  maintaining  quality  and  lowering  prices,  each 
revision  of  price  downward  nipping  dozens  of  potential 
competitors. 

Profits  in  sugar  refining  are  small,  and  until  recently 
were  steadily  declining,  usually  being  less  than  one  cent 
per  pound  for  the  refiner.  Quoting  the  chairman  of  the 
board  of  directors  of  the  American  Company :  "The  Na- 
tional, Arbuckle,  Warner,  Federal,  Revere  and  other  in- 
dependents compete  with  the  American  and  with  them- 
selves for  trade,  and  sometimes  the  small  refiner  is  the 
one  who  makes  the  price  fall.  He  can  put  the  market 
down,  but  can  never  put  it  up.  No  refiner  can  maintain 

*Boston  News  Bureau. 


44  How  to  Analyze  Industrial  Securities 

quotations  in  the  face  of  price  cutting.  No  one  refiner 
can  fix  the  price,  and  besides  the  competition  among  them- 
selves, the  refiners  have  to  contend  with  the  severe  com- 
petition of  beet  sugar.  Beet  sugar  from  Colorado  and 
California  comes  into  the  Eastern  markets  and  is  sold 
right  in  this  state  (New  York)  as  far  down  as  Albany." 

Normally,  beet  sugar  makers  offer  strong  competition. 
They  contract  for  their  beets  with  the  grower  before  they 
are  planted  and  so  have  an  advantage  in  being  able  to 
sell  in  advance  of  production,  since  cost  can  be  approxi- 
mated closely.  The  cane  refiner  knows  only  what  a  cer- 
tain consignment  of  raw  sugar  has  cost  him. 

The  Corn  Products  Company  has  been  continuously 
beset  with  the  strongest  competition.  Since  the  organi- 
zation of  the  Corn  Products  Company  several  large  com- 
panies have  begun  manufacturing  glucose,  starch,  etc., 
keeping  down  the  prices  and  preventing  the  Corn  Prod- 
ucts Company  from  making  satisfactory  headway  until 
war  and  post-war  conditions  created  unusual  demand. 

The  downfall  of  the  original  Allis-Chalmers  Company 
can  be  traced  to  severe  competition,  beginning  in  1904, 
in  heavy  reciprocating  steam  engines,  its  principal  prod- 
uct at  that  time.  One  of  the  largest  electrical  compa- 
nies began  to  manufacture  these  engines  and,  being  much 
stronger  financially,  it  hurt  the  Western  company.  In 
return  the  Allis-Chalmers  Company  began  to  manufacture 
electrical  apparatus,  but  the  larger  electrical  companies 
were  better  able  to  survive.  Following  the  drastic  reor- 
ganization and  prosperous  war  business,  the  Allis-Chal- 
mers Co.  is  now  in  position  to  compete  more  favorably. 


Competition  45 


The  experience  of  the  Jamestown  Art  Metal  Com- 
pany is  illuminating  as  to  the  effects  of  competition. 
This  company  originally  manufactured  a  line  of  stamped 
ceilings  and  other  sheet-metal  work.  Competition  be- 
came so  severe  as  to  cause  reorganization.  The  original 
field  was  considered  hopeless  and  the  company  simply 
changed  its  line,  now  making  steel  furniture,  apparently 
with  great  success. 

Take  the  leather  industry.  Here,  size  is  of  little  ad- 
vantage. Little  equipment  is  necessary  for  economical 
production,  and  new  tanneries  can  start  up  at  any  time 
and  compete  to  fair  advantage  with  those  longer  estab- 
lished. This  is  equally  true  of  the  malting  industry. 

As  stated  before,  competition  is  no  longer  as  ruthless 
as  it  used  to  be.  Besides  the  force  of  government  control, 
business  men  have  come  to  recognize  the  superior  logic 
of  co-operation  over  more  destructive  methods.  Yet  the 
race  is  certainly  to  the  strong,  and  plentiful  resources 
and  an  unusual  amount  of  brains  are  necessary  for  com- 
petition in  conditions  of  the  most  ideal  co-operation. 


PART  III 
MANAGEMENT 


XI 

The  Personal  Equation 

A  MOST  any   meaty    saying  may   be    safely   cred- 
ited either  to  Lincoln  or  Emerson.    I  believe  it  was 
Emerson  who  wrote  something  to  the  effect  that 
"an  institution  is  but  the  lengthened  shadow  of  a  single 
man."     Surely  this  has  been  true  of  most  large  corpora- 
tions. 

Were  not  the  Westinghouse  companies — at  least  until 
shortly  before  the  founder  died— the  lengthened  shadow 
of  George  Westinghouse?  Is  not  the  management  of 
the  United  States  Steel  Corporation  an  expression  of  the 
personality  of  Judge  Gary?  Can  we  not  see  in  the  de- 
velopment of  the  chain  store  organizations  the  dominant 
influence  of  two  personalities,  F.  W.  Woolworth  and 
George  Whelan? 

The  importance  of  the  personal  equation  is  much 
greater  in  industrial  than  in  railway  management.  There 
are  over  250,000  miles  of  railway  in  this  country  and 
management  has  become  so  standardized  that  it  is  not 
difficult  to  shift  men  from  one  system  to  another  without 
great  loss  or  trouble  to  the  railroads  affected.  Few  in- 
dustrial corporations  are  so  standardized.  The  activities 
and  problems  of  operation  are  so  diverse  that  the  per- 
sonnel of  management  is  of  first  importance  and  should 
be  one  of  first  consideration  to  the  investor  or  speculator. 

(47) 


48  How  to  Analyze  Industrial  Securities 

The  ability  of  the  managers  to  increase  sales,  to  lower 
costs,  to  improve  the  quality  of  the  product,  to  direct 
the  policy,  and  to  master  the  financial  problems  consti- 
tutes an  important  element  in  maintaining  the  standing  of 
industrial  securities. 

Consider  the  problems  of  the  United  States  Cast  Iron 
Pipe  and  Foundry  Company.  Because  of  careful  and 
skilful  management  it  is  operating  one-half  the  plant  fa- 
cilities it  needed  a  few  years  ago  and  is  producing  more 
pipe  than  was  possible  in  the  earlier  years.  Because  of 
superior  business  ability  the  Standard  Oil  Company,  even 
without  questionable  competitive  tactics,  would  have 
reached  an  enormous  size. 

The  head  of  an  independent  can  company  recently 
said:  "The  rise  in  Can  strikes  me  as  the  most  natural 
thing  in  the  whole  market.  There  is  not  another  indus- 
trial company  in  America  as  well  managed  as  that.  We 
are  constantly  receiving  reminders  of  its  efficiency.  Its 
managers  lead  and  we  follow;  and  we  find  we  have  to 
hustle  to  keep  up  with  them.  Because  of  the  pace  which 
they  have  set,  the  can-making  industry  of  the  United 
States  is  50  per  cent,  more  efficient  than  it  was  a  few 
years  ago." 

Whenever  the  success  of  a  corporation  depends  largely 
upon  the  managerial  ability  of  one  or  two  or  any  few 
men  the  stockholders  should  be  protected  against  the 
death  of  these  men  by  life  insurance.  This  truth  is 
becoming  more  and  more  widely  recognized,  for  in  no 
other  way  can  the  loss  of  the  managers  of  many  corpora- 
tions be  compensated  even  in  part. 


The  Personal  Equation  49 

However,  even  in  industrials  there  is  plainly  a  ten- 
dency toward  standardization  of  personnel.  Corpora- 
tions such  as  the  Western  Electric  Company  have  ar- 
ranged that  each  important  employee  has  an  "under- 
study," so  that  the  loss  of  any  one  man  would  not  be  dis- 
astrous. In  the  Woolworth  stores  the  position  of  the 
store  manager  is  by  no  means  as  dominant  as  it  was  in 
years  past.  The  work  has  been  so  standardized  that 
the  management  of  even  the  far  removed  stores  is  done 
largely  from  the  main  office,  this  being  made  possible 
through  comprehensive  analytical  daily  reports  sent  in  by 
the  store  managers. 

Yet  the  limits  of  standardization  must  be  recognized. 
For  example:  that  the  Riker-Hegeman  chain  of  drug 
stores  were  not  as  great  a  success  as  anticipated  was 
an  open  secret.  Mr.  Whelan's  United  Cigar  Stores 
methods  were  introduced  into  the  drug  stores,  but  with- 
out corresponding  result.  Mr.  Whelan  could  not  dele- 
gate his  personality  to  indifferent,  mediocre,  ill-paid  and 
dissatisfied  clerks  in  the  responsible,  specialized  drug 
business.  Control  and  management  afterwards  went 
to  drug  store  men. 

*"The  theoretical  economies  of  large-scale  operation 
may  easily  be  overbalanced  by  the  purely  human  ele- 
ment of  inefficient  ability."  Referring  to  one  particular 
corporation — the  Cotton  Duck  consolidation — Dr.  Dewing 
says :  "Its  long  continued  failure  attests  to  the  extreme 
difficulty  of  obtaining  a  man  with  skill  of  management 
sufficient  to  handle  a  large  and  scattered  group  of  mills 

*Dewing:    "Corporate  Promotions  and  Reorganizations." 


50  How  to  Analyze  Industrial  Securities 

as  economically  as  the  man  of  ordinary  ability  can  man- 
age a  single  mill." 

In  times  of  prosperity  flourishing  firms  and  corpora- 
tions do  not  need  to  seek  additional  capital.  They  are 
besieged  by  offers  from  promoters  and  underwriters  to 
recapitalize  on  a  greatly  extended  scale.  Naturally,  own- 
ers are  interested  because  recapitalization  not  only  in- 
volves the  creation  of  a  ready  market  for  shares  so  that 
part  of  it  can  easily  be  sold,  but  capital  added  to  the 
business — capital  which  can  be  used  in  carrying  out  ex- 
tensions and  in  taking  up  new  lines. 

It  often  happens  that  a  business  is  entirely  ruined  by 
the  addition  of  new  capital.  The  owners  of  a  business 
may  be  extremely  successful  in  a  small  way,  but  prove 
helpless  when  the  business  is  called  upon  to  earn  divi- 
dends on  a  large  amount  of  newly  injected  capital.  Funds 
so  easily  secured  may  be  used  less  cautiously  than  profits 
saved  out  of  earnings. 

The  McCrum-Howell  Company  furnishes  a  good  ex- 
ample. Successful  in  its  original  lines  of  heating  appara- 
tus, upon  recapitalization  it  plunged  desperately  into  the 
vacuum  cleaner  business.  This  new  line  was  not  success- 
ful and  the  corporation  went  through  a  drastic  reorgani- 
zation. 

The  Rumely  Company  was  another  example.  Upon 
being  financed  by  New  York  security  houses  its  former 
vice-president  and  general  manager  acquired  inventories 
totalling  $16,500,000,  besides  contracts  for  materials  ag- 
gregating $4,500,000.  Normal  inventories  should  have 
been  about  one- fourth  as  large.  Practically  all  the  com- 


The  Personal  Equation 


pany  funds  were  tied  up  in  inventories.  Yet  it  is  widely 
known  that  the  implement  business  requires  large  work- 
ing capital  and  must  extend  long  credits.  The  company 
lost  $6,000,000  in  round  figures  in  one  year  before  going 
into  the  hands  of  receivers,  the  loss  amounting  to  43.4 
cents  for  every  dollar  of  gross  sales. 

That  managers  of  large  business  enterprise  should 
thoroughly  understand  the  peculiar  problems  of  their 
business  will  seem  but  natural.  Hard  experience  proves 
that  the  prospective  investor  or  speculator  in  industrials 
should  find  out  whether  the  management  has  any  intelli- 
gent idea  as  to  its  duties.  Perhaps  the  most  ludicrous 
failure  of  recent  years  was  that  of  a  corporation  formed 
to  take  care  of  other  corporations  in  difficulty.  The 
managers  of  the  Assets  Realization  Company  had  so  lit- 
tle conception  of  its  limitations  that  it  assumed  liability 
in  lost  hope  enterprises  and  itself  went  through  realiza- 
tion and  liquidation. 

The  American  Locomotive  Company  presents  another 
example  of  a  corporation  which  did  not  know  the  first 
essentials  of  a  business  in  which  it  engaged  —  the  manu- 
facture of  automobiles.  Leaving  aside  controversial  mat- 
ter and  quoting  from  the  best  recognized  automobile 
manufacturers'  trade  paper  The  Automobile: 

"The  company  lost  money  on  every  car  put  out  from 
1906  (when  it  began  the  manufacture  of  automobiles) 
to  1913  (when  it  gave  up  the  business).  The  company 
put  out  57  models  in  seven  years,  an  average  of  over 
eight  different  models  from  the  same  factory  each  year. 


52          How  to  Analyze  Industrial  Securities 

To  make  matters  worse,  some  of  these  were  taxicabs, 
some  passenger  cars,  and  the  majority  trucks.  Added 
to  this  impossible  multiplicity  of  models  was  that  of  fail- 
ure to  standardize  among  these  different  ones.  For  ex- 
ample, the  company  built  its  own  steering  columns  and 
parts,  and  built  a  different  one  for  each  model,  excluding 
two  truck  types. 

"The  company  built  rear  axles,  a  combination  of  sta- 
tionary and  live  type  of  most  excellent  design,  but  of 
enormous  cost.  The  special  machine  for  making  the  sta- 
tionary part  cost  $58,000,  yet  it  was  needed  for  producing 
only  250  parts  annually.  Had  the  company  built  axles 
for  other  concerns,  which  it  would  not  do,  this  expensive 
equipment  might  have  been  converted  from  a  loss  to  a 
profitable  investment.  The  annual  meeting  of  the  stock- 
holders of  the  company  is  held  near  the  first  of  August. 
The  automobile  organization  did  not  usually  know  until 
this  meeting  even  whether  the  manufacture  of  automobiles 
would  be  continued  for  the  coming  season.  The  en- 
gineering, selling  and  advertising  departments  did  not 
know  before  this  meeting  what  policy  and  program  they 
could  carry  out  for  the  following  year,  whereas  at  this 
late  date  rival  companies  had  their  models  for  the  fol- 
lowing year  on  the  market,  well  advertised.  Advertising 
appropriations  that  were  asked  for  June  were  not  forth- 
coming until  the  end  of  October  or  early  November. 
When  the  engineering,  sales  and  advertising  departments 
would  recommend  an  output  of  800  cars,  the  purchasing 
department  would  buy  for  1,600.  In  the  factory,  ma- 
chines were  found  manufacturing  parts  for  two  week? 


The  Personal  Equation  .  53 

after  such  parts  had  been  altered  in  design  or  discon- 
tinued. 

"Being  impossibly  late  in  getting  out  its  products,  the 
annual  output  would  rarely  ever  be  sold.  The  car  pro- 
gram would  be  inflexibly  fixed  no  matter  how  late  the 
policy  for  the  year  was  decided  upon.  The  result  was 
that  the  following  July  and  August  a  large  number  of 
passenger  cars  would  remain  unsold  at  a  time  when  other 
companies  were  marketing  their  models  for  the  succeed- 
ing year. 

"The  policy  of  working  over  carried-over  cars  and 
carrying  them  along  as  new  types  for  the  following  year 
was  often  followed.  They  were  dismantled  and  changes 
in  chassis  and  body  made,  changes  which  added  enor- 
mously to  the  cost,  so  that  when  finally  disposed  of  they 
were  marketed  at  a  great  loss." 

Comment  upon  such  pretended  management  is  un- 
necessary. 

Able  management  is  not  crippled  by  changes  of  price 
in  its  supply  of  raw  materials.  Either  the  materials 
are  bought  ahead  on  exchanges  such  as  the  cotton  and 
grain  exchanges— this  "hedging"  as  it  is  called  adequately 
protecting  against  fluctuation  of  the  price — or  else  they 
secure  large  quantities  of  raw  material  when  it  is  cheap. 
Clever  managers  are  experts  on  business  and  banking 
conditions.  They  follow  cycles  and  buy  raw  materials  at 
times  of  depression  and  when,  fortunately,  money  is 
always  easy.  The  old  New  England  Cotton  Yarn 
Company  is  an  example  of  one  whose  managers  neither 
protected  themselves  on  the  exchanges  nor  were  clever 


54  Hbw  to  Analyze  Industrial  Securities 

in  buying  at  times  when  raw  cotton  was  cheap.  Immense 
losses  were  the  result. 

The  M.  Rumely  Company  was  weakened  by  unfor- 
tunately planned  and  excessive  increases  in  inventory. 

On  the  other  hand,  some  of  the  cotton  mill  people, 
for  example,  of  the  Pepperell  mill,  have  conserved 
their  cash  and  taken  advantage  of  abnormal  cotton 
markets  in  a  way  that  has  reflected  in  many  years  of 
unusually  satisfactory  dividends. 

Find  out  whether  the  managers  of  a  corporation  are 
optimistic  only  at  times  of  great  prosperity  which  unex- 
pectedly burst  upon  them,  or  whether  they  are  pre- 
pared for  prosperity  in  times  of  depression  and,  con- 
versely, whether  in  times  of  prosperity  they  are  prepared 
for  depression.  It  is  not  by  accident  that  in  the  pros- 
perity of  1906  the  United  States  Steel  Corporation  had 
some  $75,000,000  in  its  treasury,  the  largest  amount  up 
to  that  time,  nor  that  it  now  has  a  very  much  greater 
fund  in  its  treasury.  The  Steel  Corporation  was  ready 
for  the  panic  of  1907  and  is  ready  for  anything  now. 

If  a  corporation  has  been  recently  recapitalized  it  is 
of  prime  importance  to  find  out  whether  the  manage- 
ment will  remain  with  the  men  responsible  for  success  in 
the  past,  if  they  are  large  caliber  men.  The  consistent 
success  of  the  well  known  5  and  lOc.  store  companies 
is  largely  due  to  the  continued  interest  of  most  of  the 
original  interests.  The  failure  of  many  earlier  enter- 
prises resulted  from  the  retirement  of  the  founders. 


XII 

Co-operation  and  Loyalty 

IT  is  essential,  in  judging  the  securities  of  a  corpora- 
tion, to  find  whether  it  has  the  enthusiastic  loyalty  oi 
directors,  officers  and  employees.  Find  out  whether 
the  corporation  shares  its  profits  with  its  employees,  or 
offers  its  securities  to  them  on  attractive  terms  so  that 
the  employees  become  partners  in  the  business.  Freedom 
from  labor  troubles  is  one  of  the  most  important  con- 
siderations with  industrials.  There  is  little  likelihood  of 
serious  labor  troubles  in  plants  such  as  those  of  Proctor 
&  Gamble  (Ivory  Soap)  and  General  Chemical.  The 
men  are  partners  in  the  profits.  Naturally,  such  condi- 
tions create  a  spirit  of  loyalty  and  dissipate  the  natural 
distrust  of  labor  against  capital. 

The  labor  situation  is  a  source  of  weakness  to  cor- 
porations such  as  the  United  States  Realty  and  Im- 
provement Company  and  the  General  Electric  Com- 
pany. "Welfare  work"  and  profit  sharing  are  not  only 
creditable  but  are  business  necessities,  paying  for 
themselves  time  and  time  again. 

Find  out  whether  the  corporation  is  generous  with  its 
producers  of  business.  Take  the  Bethlehem  Steel  Corpora- 
tion. No  salary  in  Bethlehem  exceeds  $10,000  per  annum, 
yet  some  of  Mr.  Schwab's  associates  have  received  as 

(55) 


56  How  to  Analyze  Industrial  Securities 

high  as  $500,000  a  year,  but  they  must  earn  it.  Mr. 
Schwab  determines  a  unit  cost  in  every  department  and 
then  sets  the  premiums  for  increases  in  business  ef- 
ficiency and  economics  by  such  a  ratio  as  to  derive  the 
largest  profit  from  every  department.  The  general  staff 
shares  in  a  general  division,  but  the  men  who  make  the 
profits  in  their  departments  have  their  percentages  for 
their  wage  gain.  Where  Mr.  Schwab  has  set  the  unit 
standard  at  $1  for  cost,  and  a  manager  or  superintendent 
gets  1  per  cent,  for  reduction  down  to  95,  he  not  only  gets 
2  per  cent,  for  the  next  5  per  cent,  reduction  and  3  per 
cent,  for  the  next  5  per  cent,  reduction,  but  the  highest 
rate  applies  on  the  total  reduction,  so  that  there  is  every 
incentive  for  a  man  to  strive  for  the  last  dollar  of  ef- 
ficiency. 

A  sales  agent  for  the  Bethlehem  Corporation  is  not 
a  scrambler  for  gross  business,  for  he  gets  no  commis- 
sion on  his  sales.  He  gets  a  percentage  of  the  profits 
made  from  the  goods  he  sells.  He  is  therefore  a 
hustler  for  profits,  and  not  for  total  sales.  He  is  not  a 
mere  sales  agent.  He  must  become  a  merchant  seek- 
ing profit  in  his  sales,  studying  markets,  finance,  plant 
capacity  and  fundamentals  of  business. 

Many  companies  now  ticket  a  generous  amount  of  their 
shares  for  the  managers,  providing  an  attractive  incentive 
for  unusual  efforts. 


XIII 

Financial  Control — Alliances 

WHO  controls  the  corporation ?    Not  only  are  they 
successful,  but  are  they  trusted  in  the  banking 
world  ?    Many  a  man  is  successful  whose  credit  is 
not  good  and  whose  corporation  will  stand  little  rough 
weather  on  that  account.     On  the  other  hand,  the  right 
management,  whether  or  not  strong  financially  by  itself, 
will  command  financial  backing. 

In  many  instances  strong  financial  support  will  carry 
through  a  corporation  which  would  otherwise  succumb. 
Take  the  American  Linseed  Company  for  example.  It 
is  largely  controlled  by  Mr.  Rockefeller,  Sr.,  who  has 
provided  such  funds  as  are  required  for  a  loan,  with- 
out collateral,  an  open  book  account,  subject  to  draft 
as  needed  and  to  payment  as  the  company  has  funds, 
at  the  rate  of  5  per  cent,  per  annum,  interest  paid  on 
average  daily  balances  only. 

The  Colorado  Fuel  and  Iron  Company  is  also  under 
the  same  strong  financial  control  and  support.  Both 
companies  remained  economic  failures  for  years,  not 
earning  interest  return  on  the  capital  risks  involved. 
Yet  both  companies  are  coming  to  have  good  credit  from 
their  own  strength.  Strong  control  has  been  their  only 
means  of  salvation. 

(57) 


58          How  to  Analyze  Industrial  Securities 

A  corporation's  business  alliances  and  contracts  may 
require  scrutiny.  What  are  its  relations  with  those  who 
furnish  its  raw  products?  It  is  not  long  since  that 
one  of  the  largest  leather  companies,  although  excep- 
tionally strong  financially,  was  crippled  in  earnings  be- 
cause of  serious  differences  between  the  company  and 
the  producers  of  the  hides.  On  the  other  hand,  the 
American  Can  Company  has  obtained  its  principal  raw 
material,  tinplate,  at  rates  cheaper  than  those  quoted 
to  its  competitors. 

The  General  Electric  Company  and  the  Westing- 
house  Electric  &  Manufacturing  Company  had,  from 
1896  to  1911,  a  working  agreement  whereby  they  ex- 
changed patents  and  avoided  cutthroat  competition 
which  exists  in  some  other  lines.  Important  patents  hav- 
ing expired  by  1911  a  renewal  of  the  contract  was  not 
considered  necessary.  The  General  Electric  Company 
has  a  working  alliance  with  the  American  Locomotive 
Company  in  the  manufacture  of  electrical  locomotives 
and  with  the  Entz  Motor  Patents  Corporation  in  the 
manufacture  of  gasoline-electric  propelled  motor  cars. 
The  Electric  Company  has  a  large  stock  interest  in  the 
Entz  Corporation.  The  Westinghouse  Company  has  a 
working  agreement  with  the  Baltimore  Locomotive  Com- 
pany for  the  manufacture  of  electric  locomotives. 

Contracts  between  corporations  sometimes  result  sur- 
prisingly. The  International  Agricultural  Chemical  Cor- 
poration had  a  contract  with  the  Tennessee  Copper  Com- 
pany to  take  that  company's  production  of  sulphuric 
acid  at  $4.81  a  ton  up  to  225,000  tons  a  year.  The  price 


Financial  Control — Alliances  59 

proved  intolerable  to  the  International  and  the  amount 
was  reduced  to  180,000  tons,  the  purchaser  retaining, 
however,  an  option  on  production  above  this  minimum. 
Upon  the  beginning  of  the  European  war,  sulphuric  acid 
prices  went  to  record  figures,  and  a  compromise  was 
made  this  time  in  order  to  placate  the  Tennessee  Com- 
pany. At  one  interesting  stage  the  Tennessee  Company 
sold  a  large  amount  of  acid  to  Russia,  counting  on  a 
surplus  production  which  the  International  firmly 
claimed  under  its  contract.  Under  pleas  of  necessary 
repairs  the  Tennessee  shut  down  its  plant  entirely,  later, 
however,  rushing  to  catch  up  with  arrears  of  its  de- 
liveries. 

Any  long  term  contracts  for  materials  should  contain 
clauses  permitting  modification  of  terms  in  event  of 
abnormal  market  prices  for  materials,  labor,  or  capital 
requirements,  or  in  event  of  radical  legal  developments 
or  changes  in  taxation. 


XIV 

Financial  Policy 

THAT  a  corporation  is  an  artificial  personality  cre- 
ated by  law  is  a  truism.  Why  make  or  feel  a 
mystery  in  regard  to  corporation  financial  and  busi- 
ness policy?  Why  not  think  of  a  corporation  as  an  in- 
dividual and  judge  it  as  you  would  an  individual? 

Consider  the  S.  S.  Kresge  business  before  it  became 
an  artificial  personality.  The  first  Kresge  store  was 
opened  in  Detroit  in  1897  with  a  capital  of  $6,700.  In 
1911,  by  diligent  attention  to  business  and  reinvest- 
ment of  surplus  earnings,  the  stores  did  a  business  of 
$7,923,040  and  earned  $470,866  from  sixty-four  stores. 
This  was  before  the  incorporation  of  the  business  in 
1912. 

Wasn't  the  progress  of  the  business  analogous  to 
that  of  any  clever  private  individual  whether  he  be  a 
merchant,  doctor,  lawyer,  or  mechanic?  Doesn't  the 
careful  man  in  any  line  save  as  he  is  able  and  carefully 
invest,  gradually  becoming  independent  and  wealthy? 
The  Kresge  business  is  but  an  example  of  an  independ- 
ent effort. 

The  Crown  Cork  &  Seal  Company  of  Baltimore  is 
a  good  example  of  an  artificial  personality,  a  corpora- 
tion which  was  prudent.  Surplus  earnings  some  years 
exceeded  the  total  issue  of  stock.  Yet  it  conserved 

(61) 


G2  How  to  Analyze  Industrial  Securities 

its  earnings,  paying  but  8  per  cent,  for  several  years, 
then  gradually  increasing  to  20  per  cent.  Recently 
it  has  been  entirely  justified  in  declaring  extra  cash 
dividends.  But  it  saved  until  it  could  well  afford  to 
spend. 

It  was  through  careful  saving  that  the  Republic  Iron 
&  Steel  Company  built  up  its  important  diversified 
steel  plants. 

The  original  Standard  Oil  Company  carefully  con- 
served its  cash  and  was  always  prepared  to  take  advan- 
tage of  the  ever  changing  conditions  in  the  oil  fields 
and  the  oil  markets.  It  always  had  saved  up  huge 
amounts  for  exploring,  experimenting,  and  purchasing. 
The  wisdom  of  this  farsighted  policy  is  still  evident  in 
the  security  markets. 

From  its  organization  to  1919  the  United  States  Steel 
Corporation  has  paid  common-stock  holders  an  average  of 
only  about  4  per  cent,  in  dividends.  Had  it  been  reckless 
it  could  have  paid  5,  6,  7,  or  even  8  per  cent,  and  not 
spent  all  its  earnings,  but  it  never  would  have  had  the 
strength  it  has  to-day.  In  times  of  depression  it  would 
have  had  to  defer  the  preferred  stock  dividend  and  have 
been  brought  close  to  bankruptcy.  As  it  is,  the  cor- 
poration has  enormously  increased  its  steel  capacity  since 
1901.  It  has  spent,  out  of  earnings,  much  more  than  par 
for  each  share  of  common  stock  in  new  construction  and 
acquisition  of  property.  To-day  the  corporation  is  a 
bulwark  of  physical  and  financial  strength.  It  has  been 
prudent;  even  so,  it  could  have  been  more  careful  in 
regard  to  the  spending  of  its  surplus  earnings. 


Financial  Policy  63 


By  all  means  it  is  a  better  long  range  financial  policy 
to  conserve  earnings  until  stable  dividends  can  be  paid. 
Had  United  States  Steel  paid  on  the  common,  before 
1916,  1,  1,  1,  2,  2,  2,  2,  3,  3,  3,  3,  4,  4,  5,  5  per  cent, 
which  averages  practically  the  same  as  paying  2,  4,  3J^, 
0,  0,  0,  2,  2,  2^4,  Sy2,  5,  5,  5,  4*/4,  0  per  cent,  the  stock 
would  have,  on  the  whole,  ranked  much  higher  than  it 
did. 

If  the  corporation  afterwards  formed  to  take  over  the 
Kresge  business  had  become  reckless,  and  had  spent  not 
only  the  cash  it  earned  and  saved,  but  more  than  that, 
would  it  not  have  been  in  the  same  position  as  a  spend- 
thrift individual?  Is  not  the  corporation  which  earns 
$10  a  share  and  spends  $10  a  share  or  more  in  dividends 
as  reckless  as  the  man  who  earns  $10  and  spends  that 
much  or  more?  Is  the  result  of  reckless  corporation 
action  any  more  uncertain  than  reckless  individual 
action  ? 

The  best  known  examples  of  common  stocks  now 
valuable  but  years  ago  almost  worthless  are  the  United 
States  Steel  Corporation  and  the  Bethlehem  Steel  Cor- 
poration. The  common  stock  of  the  Bethlehem  Steel 
Corporation  was  considered  of  little  value  for  many 
years.  Dividends  on  the  preferred  stock  were  withheld 
and  every  available  dollar  carefully  used  in  enlarging 
the  scope  of  operation  and  in  extending  its  sources  of 
raw  materials.  The  results,  though  spectacular  at  pres- 
ent because  of  war  orders,  would  have  been  just  as  cer- 
tain had  no  war  begun.  The  history  of  the  United 
States  Steel  Corporation  is  somewhat  different  because 


64  How  to  Analyze  Industrial  Securities 

of  its  payment  of  the  preferred  dividend.  However, 
dividends  on  the  common  stock  were  kept  down  with 
some  evidence  of  conservatism  and  the  assets  were  built 
up  from  surplus  so  that  now  well  over  $200  per  share 
of  common  stock  is  represented  by  actual  assets. 

Some  managers  seem  to  believe  in  the  declaration  of 
unearned  dividends  as  a  means  of  keeping  up  the  credit 
of  a  corporation.  Nothing  could  be  more  disastrous  to 
credit,  but  this  false  doctrine  persists.  Unwarranted 
dividends  plainly  impair  financial  resources.  Then  when 
a  general  depression  or  any  other  untoward  circum- 
stances appear  the  invited  end  occurs.  Dividends, 
whether  or  not  warranted,  certainly  do  give  the  appear- 
ance of  prosperity  to  the  unsophisticated,  but  only  to 
such.  It  is  the  old  story  of  eating  the  cake  and  having 
it  too. 

Comparatively  few  people  have  breadth  of  vision ;  com- 
paratively few  are  willing  to  postpone  immediate  pleas- 
ure for  the  sake  of  greater  future  pleasure.  "Every 
evidence  shows  that  had  the  earlier  interests  been  willing 
to  forego  immediate  profits  and  conserve  the  funds  of  the 
corporation  the  enterprises  could  have  been  placed  on  a 
sound  footing  and  the  men  (most  interested  in  the  price 
of  the  securities)  would  themselves  have  secured  vastly 
greater  returns.  The  failures  of  the  Glucose  Sugar  Re- 
fining, the  American  Malting,  the  United  States  Realty 
and  the  New  England  Cotton  Yarn  companies  were  the 
result  of  payment  of  dividends  on  stock  which  in  each  of 
these  cases  were  unwarranted.  They  represented,  ex- 


Financial  Policy  65 


cept  for  the  subterfuges  of  accounting,  an  actual  impair- 
ment of  capital. 

"The  haste  with  which  these  early  dividends  were 
declared  was  at  variance  with  the  simplest  principles 
of  sound  finance.  In  the  majority  of  cases  dividends 
were  begun  almost  immediately  after  the  organization 
of  the  corporation,  before  an  opportunity  had  been  given 
for  the  new  enterprise  to  manifest  its  independent  earn- 
ing power.  In  very  few  cases  did  the  directors  have  un- 
questionable evidence  from  a  careful  audit  of  the  books 
to  prove  that  the  dividends  had  been  earned,  and  the 
basis  of  their  judgment  was  seldom  more  than  a  mere 
estimate,  which  failed  to  make  adequate  provision  for 
depreciation. 

"In  the  instance  of  the  American  Malting  Company, 
subsequent  revelations  showed  that  the  directors  could 
not  have  known  what  the  earnings  actually  were  at  the 
time  the  first  dividend  on  the  stock  was  declared,  be- 
cause in  the  court  testimony  it  appears  that  the  gen- 
eral books  had  not  then  been  balanced  from  the  books 
of  the  branches.  Similar  conditions  probably  existed  in 
other  corporations  where  the  methods  of  accounting 
have  not  been  subject  to  as  rigorous  a  scrutiny."* 

Another  example  of  reckless  dividend  payment  is  that 
of  the  old  Union  Bag  &  Paper  Company.  In  its  first 
year,  after  payment  of  the  7  per  cent,  preferred  dividend, 
there  was  left  a  surplus  of  $724,169,  but  after  that  time 
the  company  was  not  justified  in  paying  the  full  rate 


*Dewing,  549,  551. 


66  How  to  Analyze  Industrial  Securities 

in  any  year,  although  it  was  paid  for  nearly  eight  years 
before  any  reduction  was  made.  During  those  eight 
years  very  little  was  charged  off  for  depreciation,  and 
through  that  period  property  and  equipment  expendi- 
tures were  skimped.  Following  a  bond  issue  authorized 
in  order  to  provide  for  extensions  and  to  provide  an  ade- 
quate supply  of  raw  material  the  rate  was  reduced  in 
1906  to  5^2  per  cent,  and  to  4  per  cent,  for  each  suc- 
ceeding year  to  1912.  In  1913  3  per  cent,  was  paid  and 
none  at  all  since  until  1916.  In  1912  two  machines, 
costing  $250,000,  reduced  the  cost  of  paper  $4  a 
ton.  Had  the  corporation  been  more  conservative  in 
dividends  many  other  such  improvements  could  have 
been  provided.  Unusual  general  prosperity  has  brought 
better  prospects  to  this  hitherto  weak,  competition-ridden 
corporation.  It  has  been  reorganized,  the  new  corpora- 
tion having  but  one  class  of  stock:  common.  The  pre- 
ferred stock,  with  unpaid  dividends  and  the  old  common, 
were  primed  in  the  exchange. 

The  American  Ice  Company,  after  a  somewhat  dis- 
astrous early  career,  reformed  and  is  now  on  its  way  to 
security.  The  corporation  has  retired  a  large  note  issue 
out  of  earnings,  has  worked  up  a  respectable  working 
capital,  and  has  built  artificial  ice  plants  out  of  earn- 
ings. 

In  1887  the  Midvale  Steel  Company  was  in  trouble 
largely  because  of  excessive  dividends.  Outside  interests 
obtained  control,  and  for  ten  years  no  returns  were  made 
to  stockholders  and  all  the  earnings  were  conserved. 
Profits  increased  until  they  far  outmeasured  the  capitali- 


Financial  Policy  67 


zation  of  $750,000.  In  1897  dividends  were  again  de- 
clared. This  is  the  corporation  which  added  subsidiaries 
to  itself  and  reported  profits  of  around  $30,000,000  in  a 
single  year  after  the  original  stock  was  turned  in  for 
$230  a  share  cash.  It  is  interesting  to  figure  this  price 
on  a  basis  of  the  stock  as  before  February,  1910,  when 
a  dividend  in  stock  of  1,200%  was  declared. 


PART  IV 
BALANCE  SHEETS— DEBIT 


XV 

Lack  of  Uniformity 

SKILL  and  analysis  are  apt  to  be  unavailing  if  ex- 
pended upon  information  which  is,  in  fact,  misin- 
formation. Nearly  all  large  corporations  publish  an- 
nual reports,  available  upon  request  to  the  secretary. 
With  the  increase  of  publicity  these  annual  reports  are 
increasingly  valuable.  In  periods  of  prosperity  they  are 
usually  conservative.  The  managers  take  care  that  the 
depreciation  is  well  taken  care  of,  that  machinery  is  well 
maintained  and  that  bad  debts  are  eliminated.  It  is  not 
at  all  unusual  that  actual  conditions  are  much  better 
than  as  shown  by  the  published  reports.  Hidden  assets 
in  the  form  of  unwarranted  reserves  for  depreciation  are 
created,  property  is  acquired  out  of  surplus  earnings 
which  does  not  appear  in  the  balance  sheets,  a  store  of 
fat  is  secretly  laid  up  against  the  lean  years  which  fol- 
low those  of  plenty. 

In  times  of  adversity  corporation  reports  must  often 
be  viewed  with  skepticism.  With  earnings  impaired 
managers  are  inclined  to  skimp  depreciation,  mainte- 
nance and  reserves  in  order  to  make  a  creditable  show- 
ing. It  follows,  then,  that  with  our  customary  sequence 
of  prosperity  and  depression  the  interpretation  of  ac- 
counts submitted  must  usually  be  made  with  considera- 
tion as  to  general  conditions. 

(69) 


70  How  to  Analyze  Industrial  Securities 

It  must  be  remembered  that  as  yet  no  uniform  sys- 
tems of  industrial  accounting  are  required.  Many  in- 
come accounts  are  noteworthy  for  what  they  omit  or 
conceal  rather  than  for  what  they  convey.  The  securities 
of  corporations  which  do  not  publish  adequate  reports 
must  often  be  considered  pure  speculations.  The  re- 
quirements of  the  Federal  Income  Tax  have  done  much 
toward  showing  the  possibilities  of  adequate  accounting. 
The  Federal  Trade  Commission  has  power  to  require 
reports  from  corporations  as  it  sees  fit.  The  Federal 
Reserve  Board,  Washington,  has  published  a  bulletin, 
"Approved  Methods  for  the  Preparation  of  Balance 
Sheet  Statements."  This  bulletin  is  a  reprint  of  infor- 
mation and  data  acquired  by  the  Federal  Trade  Com- 
mission from  the  American  Institute  of  Accounts.  The 
bulletin  gives  a  proposed  "Profit  and  Loss  Account" — 
called  in  this  book  (page  167)  Income  Account,  as  well 
as  a  proposed  balance  sheet.  The  accompanying  remarks 
are  well  worth  attention.  It  is  reasonable  to  expect  that 
uniform  forms  of  accounting  will  eventually  be  provided 
for  the  different  industrial  lines  as  they  have  for  railways. 
Owing  to  the  various  kinds  of  industrial  activity,  from 
say  commission  merchandising  or  publishing,  to  ship- 
building, various  standard  forms  will  eventually  be  re- 
quired. 


XVI 

Certificates  of  Public  Accountants 

TOO  much  reliance  has  been  placed  upon  the  in- 
dorsement of  public  accountants  of  income  accounts 
andbalance  sheets.  Of  course  an  uncertified  financial 
report  is  like  an  unsearched  real  estate  title.  But  as  there 
are  various  grades  of  skill  and  reliability  in  the  field  of 
title  searching,  just  so  are  there  various  grades  of  skill 
and  responsibility  in  public  accounting  work.  Nor  does  it 
necessarily  avail  that  the  financial  report  be  certified  by 
a  public  accounting  firm  of  large  size  and  many  offices. 
Two  of  the  largest  firms,  whose  certificates  are  found 
on  many  large  corporations'  reports,  do  not  enjoy  a  good 
reputation  among  accountants.  On  the  other  hand  the 
writer  has  been  employed  by  two  of  the  largest  firms 
in  the  country,  whose  standing  is  above  suspicion.  Firms 
do  exist  which  will,  for  a  small  fee,  certify  to  balance 
sheets  which  are  entirely  if  not  criminally  misleading. 
It  is  unfortunate  that  the  public  accounting  firm  is  not 
chosen  by  the  stockholders  as  is  the  case  abroad.  In 
this  country  the  officers  of  a  corporation  choose  the 
auditors  and  naturally  they  will  find  such  as  will  certify 
to  the  accounts  as  the  officials  present  them. 

One  especial  abuse  in  accounting  work  is  the  bidding 
system.  Many  corporations  do  not  realize  the  impor- 
tance of  thorough  work,  and  actually  solicit  bids  for  the 

(71) 


72  How  to  Analyze  Industrial  Securities 

work.  Fancy  submitting  questions  of  a  law  involving  mil- 
lions of  dollars  to  the  lawyer  making  the  lowest  bid  for 
the  case !  Another  source  of  abuse  is  the  "partial  audit," 
the  accountants  being  employed  to  audit  only  part  of 
the  accounts  or  part  of  the  books,  while  the  financial 
reports,  as  submitted  to  the  public,  appear  to  the  un- 
suspecting to  be  founded  on  books  of  account  entirely 
vouched  for. 

The  first  step  to  be  taken  by  the  prospective  investor 
or  speculator  is  to  find  that  the  records  are  certified  by 
a  firm  of  public  accountants,  the  second  is  to  ascertain  the 
reputation  of  the  public  accountants,  the  third  to  examine 
the  nature  of  the  certificate.  Sometimes  it  means  little 
that  books  of  account  are  O.  K.'d  by  a  firm  of  public 
accountants.  It  may  simply  mean  that  according  to  the 
contract  made  by  the  company  with  the  accountants  the 
certificate  proclaims  that  the  books  are  in  balance,  with 
no  responsibility  whatever  as  to  the  reliability  or  truth- 
fulness of  the  accounts  themselves.  Many  contracts 
specify  that  the  accountants  are  not  paid  to  go  back  of  the 
books  themselves,  the  entries  in  which  may  be  entire- 
ly incorrect.  Again,  the  accountants  may  not  audit  any- 
thing except  the  main  books  of  a  large  corporation,  the 
books  of  subsidiary  corporations  remaining  untouched. 

Early  in  his  business  experience  the  writer  had  charge 
of  the  books  of  a  subsidiary  of  a  corporation  whose 
stocks  were  listed  on  the  New  York  Stock  Exchange. 
The  subsidiary  corporation  erected  a  very  large  office 
building.  The  shell  was  completed  and  charged,  as  it 
should  be,  against  capital,  The  building  was  completed, 


Certificates  of  Public  Accountants  73 

partitions  and  fixtures  were  installed,  and  this  large 
amount  was  treated  as  an  expense  under  the  blind  of 
"Fixtures  for  Tenants."  One  of  the  largest  firms  of 
public  accountants  certified  to  the  financial  records  of 
the  parent  corporation,  never  even  touching  the  subsidi- 
ary books,  which  would  have  disclosed  concealed  assets 
running  up  into  six  figures. 

To  be  dependable  an  accountant's  report  must  accept 
full  responsibility  for  all  books  of  record,  including  all 
subsidiary  books  and  all  sources  of  entries  made  thereon 
as  well  as  the  valuation  of  all  property  listed.  If  this 
be  found  over  the  signature  of  a  firm  of  public  ac- 
countants having  a  proper  reputation  the  books  of  ac- 
count may  be  accepted  with  assurance.  It  must  be  re- 
membered that  accountants  take  upon  themselves  no 
responsibility  for  which  they  do  not  show  obligation  in 
their  certificate. 

The  smash  in  the  McCrum-Howell  Company  is  one 
of  many  examples  of  companies  ending  in  a  most  spec- 
tacular failure  soon  after  the  publication  of  a  wonderful 
financial  report  signed  by  a  firm  of  public  accountants. 
It  transpired  that  a  large  part  of  the  assets  appeared  on 
the  books  but  no  place  else. 

In  certain  flotations,  for  example,  Pugh  Stores,  securi- 
ties have  been  sold  on  the  standing  of  the  public  account- 
ants which,  according  to  the  prospectus  "audited  the 
books  and  accounts."  Later  it  would  be  found  that  while 
the  books  and  accounts  were  duly  audited,  the  certified 
figures  were  not  those  given  out.  The  reliability  of  the 
distributor  of  all  information  should  be  beyond  ques- 
tion and  the  accountants'  report  should  be  available, 


XVII 

Complete  Balance  Sheet 

THE  balance  sheet  first  demands  our  attention  in  the 
analysis  of  accounts.  This  is  simply  a  statement 
showing,  or  purporting  to  show,  the  financial  condi- 
tion of  a  company  as  of  a  given  date,  usually  the  last  day 
of  the  company's  business  or  fiscal  year.  It  is  a  state- 
ment of  what  the  company  owns  and  what  it  owes. 

An  annual  report  usually  contains  both  a  balance  sheet 
and  an  income  account.  Both  are  entirely  necessary. 
Years  ago  the  American  Sugar  Refining  and  the  Stand- 
ard Oil  Company  published  balance  sheets  but  no  in- 
come accounts.  Those  interested  in  the  securities  would 
then  attempt  to  figure  the  earnings  by  comparison  of 
the  latest  with  prior  balance  sheets,  taking  into  consid- 
eration the  dividends  paid  during  the  past  year.  These 
calculations  proved  an  interesting  pastime  but  did  not 
appreciably  lessen  the  advantage  of  the  few  insiders 
who  knew  the  actual  status  of  the  company  and  its 
earnings. 

A  company  may  have  splendid  earnings,  yet  if,  like 
the  old  Westinghouse  Electric  &  Manufacturing  Com- 
pany, it  has  large  maturing  debts  it  cannot  take  care  of, 
or  if  it  lacks  cash  much  needed  for  other  purposes,  it 
is  not  safe.  The  balance  sheet  only  will  disclose  the 
true  state  of  affairs. 

(75) 


76  How  to  Analyze  Industrial  Securities 

Some  corporations,  equipment  companies  for  ex- 
ample, are  engaged  in  a  business  showing  violent  fluctu- 
ations. Some  of  them,  particularly  the  American  Car 
&  Foundry  Company,  are  well  prepared  in  financial 
strength  for  depressions  and  an  income  account  for  a 
poor  year  without  a  balance  sheet  would  not  give  a  fair 
impression. 

For  convenience  in  following  these  articles  a  com- 
monly accepted  form  of  balance  sheet  is  given.  Several 
of  the  items  are  supported  by  schedules  of  the  accounts 
making  up  the  major  items.  Amounts  in  figures  are  pur- 
posely omitted. 

As  industrial  enterprises  differ  so  materially  in  nature 
of  business,  it  cannot  be  expected  that  all  corporations 
will  present  balance  sheets  in  forms  even  approximately 
approaching  the  one  given.  It  is  hoped,  however,  that 
the  balance  sheet  and  schedules  will  suggest  to  stock- 
holders of  some  corporations  where  the  financial  state- 
ments they  receive  should  give  more  explicit  and  detailed 
information. 


Complete  Balance  Sheet 


77 


THE  MONTVILLE  MANUFACTURING  COMPANY. 
Balance  Sheet  December  31,  1918. 


Assets. 


Fixed  or  Capital  Assets. 

Plant  and  Property.   Sched- 
ule 1. 

Investments.   Schedule  2. 

Treasury  Stock  at  Par. 

Treasury  Bonds  at  Par. 

Patents. 

Trademarks. 

Goodwill. 
Working  and  Trading  Assets. 

Inventories,  Schedule  3. 
Current  Assets: 

Cash.    Scheduled 

Securities.     Schedule  5. 

Accounts  Receivable. 

Accrued   Interest   on    Bonds 
Owned. 

Dividends     Declared     on 
Stocks   Owned. 

Drafts  and  Notes  Receivable. 

Interest  Accrued   on   Drafts 
and  Notes  Receivable. 

Due     from     Subscribers    to 
Capital  Stock. 

Total  Current  Assets. 
Sinking      Fund      for      Bonds. 

Schedule  6. 
Insurance  Fund. 
Pension  Fund. 
Deferred  Assets.  Schedule  7. 


Capital,  Liabilities  and  Surplus. 

Capital  Stock. 
Preferred : 
Authorized. 
Less — Unissued. 
Issued  and  Outstanding... 
Common : 

Authorized 

Less — Unissued. 
Issued  and  Outstanding... 
Capital  Stock  Subscribed.. 
First  Mort.  5%  Bonds. 
Authorized. 
Less — Unissued. 
Issued  and  Outstanding. . . 
Five    year    6%    Notes    Issued 

and    Outstanding 

Current  Liabilities: 

Taxes  Accrued   

Payroll  Accrued  

Accounts  Payable. 

Notes  and  Drafts  Payable. 

Expenses  Accrued. 

Interest    Accrued    on    Notes 

and  Drafts  Payable. 
Dividends  Payable. 
Interest    Accrued    on    First 

Mort.  Bonds. 
Interest    Accrued    on    Five 

Year  Notes 

Total   Current    Liabilities . . . 
Reserves.     Schedule  7. 
Profit  and  Loss  Surplus. 
Capital    Surplus    


Total 


Total 


Contingent  Liabilities 

with  particulars. 


78  How  to  Analyze  Industrial  Securities 

On  the  left,  debit  or  asset  side  of  the  balance  sheet 
are  usually  found  three  classes  of  accounts :  fixed,  capital, 
or  permanent  assets;  current  or  quick  assets,  and  de- 
ferred assets.  On  the  right  hand,  credit  or  liability  side 
of  the  balance  sheet,  are  normally  found  capital  liabilities, 
i.  e.,  stocks  and  bonds;  current  liabilities;  reserves  and 
surplus.  The  classes  of  accounts  on  both  assets  and 
liability  sides  of  the  balance  sheet  will  be  considered 
in  detail. 

SCHEDULES  SUPPORTING  BALANCE  SHEET. 

1.  Plant  and  property: 

Land  and  buildings. 
Additions  to  buildings. 
Plant  equipment. 
Horses,  wagons  and  motors. 
Furniture  and  fixtures. 

2.  Investments : 

Securities  owned:  Names  and  amounts  of  stocks  and 
bonds  with  dividend  and  interest  yield,  price  paid 
and  present  market  price. 

3.  Inventories : 

Raw  Materials. 
Manufacturing  department. 
Finished  good,  manufacturing. 
Finished  goods,  trading. 
Shipping  department. 
Coal,  oil  and  waste. 
Stable  and  garage  supplies. 
Postage,  stationery,  &c. 

4.  Cash  in  hand  and  on  deposit: 

Cash  in  bank. 

Impressed  cash,  and  Expense  fund. 

Freight  deposit. 

5.  Securities : 

See  Schedule  No.  2. 

6.  Sinking  Fund: 

See  Schedule  No.  2. 


Complete  Balance  Sheet  79 


7.  Deferred  charges  to  expense: 

Discount  on  bonds. 
Legal  expense  deferred. 
Organization  expense. 
Insurance  prepaid. 
Rent  paid  in  advance. 
Taxes  paid  in  advance. 
Advertising. 
Advances  for  subsidiaries: 

8.  Reserves  for: 

Depreciation,   Buildings,  Equipment,  etc. 
Outside  investments. 
Subsidiary  securities. 
Treasury  stock. 
Treasury  bonds. 
Raw  materials. 
Current  asset  securities. 
Accounts  and  notes  receivable. 
Sinking  and  other  fund  securities. 

Extinguishment  of  assets. 
Dividends. 


XVIII 

Fixed  or  Capital  Assets 

FIXED,  capital  or  permanent  property  assets  consist 
of  land  and  buildings,  machinery,  tools,  equipment 
patents,  trademarks,  goodwill,  horses,  wagons,  mo- 
tors, furniture  and  fixtures  and  investments.  All  the 
fixed  assets,  excluding  investments,  are  often  combined 
in  one  item :  Plant  and  Equipment.  When  set  down  sep- 
arately the  amount  is  presumed  to  represent  the  actual 
value  of  the  property.  If  the  amount  given  is  explained 
as  "Plant  and  Equipment,"  inquiry  is  open  as  to  the 
date  and  basis  of  valuation  as  well  as  to  the  experi- 
ence and  reputation  of  those  whose  valuation  has  been 
taken. 

Not  infrequently  are  the  valuations  of  fixed  assets, 
however  stated,  largely  fictitious;  in  fact,  simply  an 
arbitrary  amount  to  offset  the  amount  of  stocks  and 
bonds  on  the  other  side  of  the  balance  sheet.  Such 
assets  are  usually  largely  water,  whether  listed  as  partly 
goodwill,  which  is  usually  water,  or  not. 

The  combination  of  tangible  asset  accounts  with  in- 
tangible assets  such  as  goodwill,  patents  and  so  forth, 
not  only  baffles  successful  analysis  of  the  real  value  of 
the  assets  and  the  amount  of  water,  but  also  prevents 
determination  as  to  whether  the  proper  amount  of  de- 
preciation is  being  charged  from  earnings  by  the  cor- 
poration. 

(81) 


82  Hbw  to  Analyze  Industrial  Securities 

Reliable  public  accountants  who  assume  responsibility 
for  the  valuation  of  assets  verify  them  by  their  own 
count  and  appraisal;  secondly,  by  the  co-operation  of 
technical  engineers  and  professional  appraisers.  Many 
certificates  of  accountants  do  not  make  clear  whether 
the  plant  account  is  simply  a  bookkeeping  figure.  Too 
often  a  company's  own  count  and  valuation  of  inventory 
is  accepted  without  check. 

In  bond  and  stock  circulars  this  statement  is  often 
found:  "The  following  figures  show  the  value  of  the 
plants  as  appraised  by  conservative  independent  author- 
ities." Appraisals  as  well  as  certificates  of  financial  state- 
ments in  general  must  be  considered  with  decided  skepti- 
cism. Nothing  can  be  taken  for  granted  simply  because  it 
is  on  paper,  even  on  paper  from  the  offices  of  the  best 
security  dealers  in  the  country.  They  make  mistakes. 
It  is  for  the  investor  or  speculator  to  avoid  assuming  the 
loss  arising  from  such  errors. 

Many  an  appalling  industrial  wreck  has  been  caused, 
many  a  promising  business  has  been  blighted,  because  of 
overvaluation  of  obsolete  fixed  assets  or  the  failure  to 
preserve  the  original  value  of  the  fixed  assets,  plant, 
machinery  and  equipment. 

A  recent  example  of  overvaluation  of  plant  assets  was 
in  the  General  Motors  Company.  It  was  incorporated 
in  1908  to  take  over  some  26  automobile  and  accessory 
companies.  As  was  the  case  with  the  Rumely,  its  man- 
agement bought  raw  materials  and  equipment  with  a 
lavish  hand  and  with  little  regard  for  the  effect  on  the 


Fixed  or  Capital  Assets  83 

company's  finances.  By  1910  General  Motors  was  in 
bad  condition.  A  large  banking  house  took  charge  and 
charged  off  about  $10,000,000  representing  scrap  ma- 
terial and  useless  machinery  formerly  booked  as  assets. 
With  improved  management  the  company  made  steady 
progress  after  this  drastic  procedure. 

The  collapse  of  the  New  England  Cotton  Yarn  Com- 
pany, previously  mentioned,  was  due  to  taking  over  and 
issuing  securities  against  plants  woefully  overvalued  and 
largely  obsolete,  as  well  as  to  poor  management. 

The  same  was  true  of  the  National  Starch  Manufac- 
turing Company  and  the  Glucose  Sugar  Refining  Com- 
pany. Even  after  the  starch  and  glucose  companies  were 
merged  and  the  resultant  corporation  placed  under  the 
control  of  E.  T.  Bedford  it  was  authoritatively  stated  in 
the  Government  trust  suit  against  the  corporation  that 
"when  the  present  organization  took  over  the  properties, 
they  were  in  a  dilapidated  condition,  the  machinery  was 
antiquated,  buildings  unsuitable  for  the  manufacture  of 
the  company's  products,  and  costs  at  a  level  that  would 
not  permit  of  a  return  on  the  investment." 

In  fact  after  reorganization  of  the  present  Corn 
Products  Company  its  president  stated :  "During  the  past 
fifteen  years  three  successive  reorganizations  of  the 
industry  have  been  rendered  necessary  because  of  the  pay- 
ment of  greater  amounts  in  dividends  than  was  consistent 
with  the  proper  up-keep  of  the  plants."  This  should 
emphasize  the  importance  of  ascertaining  the  condition 
of  the  plant  and  equipment  of  corporations  before  in- 
vesting in  their  securities. 


84  Hbw  to  Analyze  Industrial  Securities 

Naturally,  unmaintained  plants,  or  plants  obsolete  be- 
cause of  changes  in  process,  cannot  compete  to  advan- 
tage with  those  properly  maintained  and  with  the  latest 
equipment.  The  American  Malting  Company  for  many 
years  was  tremendously  handicapped  because  of  owning 
plants  which  were  entirely  out  of  date  and  suited  only 
for  the  production  of  malt  by  the  hopelessly  expensive  and 
slow  "floor  process."  Likewise  the  Pennsylvania  Steel 
Company,  which  was  taken  over  by  the  Bethlehem  Steel 
Corporation,  was  unable  to  compete  in  ordinary  times 
with  more  modern  and  economical  plants.  Only  the  un- 
usual market  conditions  of  the  war  boom  enabled  the 
plants  to  reopen  to  advantage.  Since  the  acquisition  of 
these  properties  upwards  of  $50,000,000  have  been  ex- 
pended for  improvements  and  extensions  and  the  plants 
thoroughly  modernized.  Although  a  large  part  of  the 
funds  were  used  on  the  shipyard  department  the  status  of 
the  iron  and  steel  making  plant  has  entirely  changed. 

Some  corporations  claim  to  offset  depreciation  by 
repairs,  renewals  and  improvements,  without  making  the 
conventional  depreciation  charges.  Such  claims  usually 
will  not  bear  the  strict  investigation  which  they  call  for. 
Such  substitute  measures  usually  suggest  a  lack  of 
method  of  providing  for  the  depreciation  of  property. 

Even  granting  that  plants  may  be  "maintained"  to 
original  capacity,  in  these  days  of  rapid  strides  in  in- 
dustrial processes  entire  plants,  not  to  say  parts  of 
equipment  or  certain  processes,  may  become  obsolete. 
Such  was  the  case  with  the  complete  plants  of  the 
American  Malting  Company.  It  is  necessary,  therefore, 


Fixed  or  Capital  Assets  85 

that    depreciation,    including  obsolescence,   be   provided 
for  adequately. 

To  be  sure,  part  of  the  "Plant  and  Equipment"  does 
not  necessarily  depreciate  at  all.  For  this  reason  land 
and  buildings  should  be  separately  itemized.  The  land 
itself  may  increase  in  value  and  sometimes  buildings  de- 
preciate slowly.  When  accounts  are  not  separately 
stated,  analysis  is  to  just  that  extent  doubtful  and  the 
security  of  the  investor  or  speculator  compromised. 

Depreciation  should  in  most  instances  bear  close  rela- 
tion to  the  business  of  a  corporation.  Of  course  a  plant 
may  rust  out  more  quickly  than  it  can  wear  out.  But 
with  companies  owning  large  sources  of  raw  materials 
depreciation  on  raw  materials  not  rapidly  depleted  may 
be  nil.  This  is  true  with  the  holdings  of  ore  and  coal 
lands  of  steel  corporations,  woodlands  of  paper  and 
match  manufacturers. 

It  is  obvious,  therefore,  that  while  it  is  essential  that 
all  fixed  assets  of  a  corporation  must  be  preserved,  the 
rate  of  depreciation  of  wear,  tear  and  of  the  obsolescence 
of  these  assets  varies  in  different  industries  and  condi- 
tions. Referring  again  to  ore  land,  one  is  reminded  of 
Mr.  Hill's  remark  that  "iron  ore  does  not  go  out  of 
style." 

From  five  to  ten  per  cent,  is  an  average  rate  of  de- 
preciation on  manufacturing  plants,  not  including  sources 
of  raw  material.  Theoretically  a  good  steel  plant,  for 
example,  depreciates  at  the  rate  of  ten  per  cent,  a  year, 
provided  ordinary  repairs  are  made. 


86  How  to  Analyze  Industrial  Securities 

*  If  a  company  has  but  one  plant  it  is  almost  impos- 
sible to  keep  it  at  full  value  year  after  year,  because  it 
depreciates  as  a  whole.  It  is  possible  for  a  company  to 
keep  its  plants  in  as  good  condition  as  possible  and  to 
add  new  construction  out  of  earnings  and  so  counter- 
balance loss  suffered  elsewhere  by  depreciation.  Usu- 
ally new  construction  out  of  earnings  does  not  occur  and 
unless  a  definite  policy  of  depreciation  charges  is  adhered 
to,  an  evil  day  will  come  when  the  plant  which  has  been 
well  "maintained"  out  of  earnings  will  suddenly  be 
found  obsolete  if  not  worn  out. 

In  actual  practice  two  general  methods  of  depreciation, 
aside  from  "maintenance,"  are  commonly  used.  One  is 
to  keep  the  assets  at  the  original  or  arbitrary  value,  set- 
ting up  a  "Reserve  for  Depreciation,"  on  the  liability  or 
credit  side  of  the  balance  sheet  out  of  the  earnings  to 
compensate  for  depreciation  and  obsolescence.  The 
other  is  to  charge  off  earnings  directly  against  the  assets, 
showing  depreciation  and  obsolescence  allowance  by  ex- 
hibiting each  year  a  declining  value  of  original  assets. 

Theoretically,  at  least,  the  first  method  seems  prefer- 
able, because  the  original  and  additional  assets  are  at 
all  times  visible,  with  the  reserve  on  the  other  side  of  the 
balance  sheet  counterbalancing  the  loss  through  deprecia- 
tion and  obsolescence. 

The  Liggett  &  Myers  Tobacco  Company  has  kept  its 
plants  from  dangerous  depreciation  and  obsolescence  in 
two  ways.  Quoting  an  interview  of  some  little  time 

*See  Cole— Accounts  96-106. 


Fixed  or  Capital  Assets 87 

ago:  "The  real  estate,  machinery  and  fixtures  amount 
to  $7,165,038,  against  which  there  is  a  reserve  for  de- 
preciation amounting  to  $2,021,379.  As  a  matter  of  fact, 
the  real  estate  has  appreciated  in  value,  and  I  may  state 
that  the  physical  condition  of  all  property  is  in  better 
condition  than  ever  before.  Modern  machinery  has  been 
installed,  and  everything  in  connection  with  the  various 
manufacturing  plants  is  kept  up  to  date." 

The  United  States  Steel  Corporation  has  kept  its  prop- 
erty account  at  relatively  the  same  figure  year  after  year, 
applying  as  a  reduction,  the  balances  in  Depreciation  and 
Sinking  Funds,  which  at  the  end  of  1918  amounted  to 
$307,324,775.  Mr.  Herbert  Knox  Smith,  of  the  United 
States  Bureau  of  Corporations,  reported  that  the  United 
States  Steel  Corporation  had  from  April  1,  1901,  to 
December  31,  1911,  charged  off  $43,077,687  more  for 
depreciation  than  was  necessary ;  in  other  words,  creating 
a  hidden  surplus  to  this  extent  by  charging  off  this  amount 
of  property  which  retained  its  value. 

The  technical  depreciation  charges  of  the  corporation 
are  but  the  beginning  of  what  it  has  done  to  maintain  its 
position  out  of  earnings. 

As  is  the  case  with  certain  other  steel  manufacturers, 
large  sums  have  been  spent  for  renewals,  improvements, 
and  so  forth,  which  have  much  more  than  offset  the  de- 
preciation and  obsolescence.  When  it  is  considered  that 
largely  as  a  result  of  additional  exploration  work  United 
States  Steel  seems  to  have  as  much  iron  ore  in  sight 
to-day  as  at  any  time  since  its  organization,  and  is  better 


88 How  to  Analyze  Industrial  Securities 

fortified  from  the  standpoint  of  fuel  than  it  was  on  the 
day  it  began  business,  and  this  without  material  addition 
of  capital,  it  is  evident  that  the  Steel  Corporation  has 
not  only  maintained  its  position  but  has  greatly  bet- 
tered it.  To  be  sure,  analysis  of  individual  classes  of 
assets  is  impossible  because  they  are  "lumped,"  yet  the 
depreciation  and  other  charges  out  of  earnings  have 
been  so  heavy  as  to  leave  no  possibility  of  skimping.  In 
fact,  so  much  has  been  charged  of!  for  depreciation, 
used  in  extraordinary  replacement  and  in  new  construc- 
tion, including  the  Gary  works,  that  the  common  stock, 
once  entirely  "water,"  is  now  represented  by  over  par 
in  tangible  assets. 

The  General  Electric  Company  is  another  corporation 
whose  assets  have  been  maintained  and  greatly  increased 
out  of  earnings.  In  the  past  fifteen  years  it  has  charged 
off  annually  for  depreciation  an  average  of  about  thirty- 
six  per  cent,  of  book  valuation.  From  1901  to  1908  de- 
preciation charges  in  percentage  to  book  value  were  even 
greater  than  those  over  later  years,  up  to  the  years  of  war 
conditions.  The  highest  percentage  was  forty-six  per  cent, 
in  1902,  the  lowest  ten  per  cent,  in  1909.  It  is  apparent, 
therefore,  that  no  value  would  remain  on  the  books  at  all 
were  it  not  that  new  construction  has  continually  been 
made.  At  the  beginning  of  the  year  1915  General  Electric 
valued  its  plants  at  $31,063,332.  During  the  year  it  added 
$4,485,069  in  real  estate,  machinery,  patterns  and  fixtures. 
It  charged  off  for  depreciation  $5,985,069  from  the  same 
class  of  accounts,  leaving  the  property  accounts  totaled 
at  $29,563,331,  smaller  than  at  the  beginning  of  the  year. 


Fixed  or  Capital  Assets  89 

The  company  values  its  vast  number  of  patterns  at 
nothing  whatever,  and  has  kept  the  ratio  of  book  value 
to  each  square  foot  of  floor  space  at  the  ridiculously  low 
value  of  about  $2  for  many  years  past. 

Of  course,  the  plants  of  the  General  Electric  Com- 
pany are  worth  several  times  the  value  on  its  books. 
Assets  valued  at  less  than  their  worth  proclaim  strength, 
which  will  ultimately  benefit  the  security  holder.  Though 
unnecessary  depreciation  allowances  on  any  property 
create  hidden  assets  to  just  the  extent  of  the  excess  de- 
preciation, yet  the  practice  is  conservative  and  harm- 
less because  done  openly  and  because  it  shows  up  in 
income  accounts  and  in  the  balance  sheets  open  to  all. 
The  security  holder  is  not  deceived  into  underrating  his 
holdings  and  selling  them  at  a  loss  as  in  cases  where  fic- 
titious expense  accounts,  such  as  "Alterations  for  Ten- 
ants," are  charged  for  new  capital  assets  of  construc- 
tion. 

It  seems  scarcely  possible  that  the  General  Electric 
Company  could  ever  have  suffered  the  pangs  of  ad- 
versity. Yet  after  beginning  dividends  and  selling  in 
1893  at  114,  the  stock  sold  down  to  $20  a  share  and  a 
reorganization  ensued.  The  capitalization  was  cut  down 
and  the  book  value  of  plants  and  securities  owned  were 
marked  down  to  agree  with  reasonable  appraisal.  Gen- 
eral Electric  learned  conservatism  from  actual  experi- 
ence, and  never  has  forgotten  the  lesson. 

Actual  cash  value  is  not  an  absolute  assurance  of 
corporate  value,  however.  The  old  Allis-Chalmers  Man- 
ufacturing Company  had  over  $100  in  assets  for  every 


90  How  to  Analyze  Industrial  Securities 

dollar  of  its  securities  outstanding,  yet  these  securities 
became  practically  worthless.  Great  plants  with  magnifi- 
cent machinery  may  be  a  liability  if  they  must  be  pre- 
served at  a  large  cost  for-  depreciation  and  out  of  bor- 
rowed capital  without  business  existing  to  keep  these 
assets  employed.  It  is  possible  for  a  company  to  be 
found  as  was  the  Allis-Chalmers  Company,  land  and 
plant,  or  assets,  poor.  This  company  could  not  pay  in- 
terest on  its  debts  because  of  the  lack  of  business. 

An  important  consideration,  usually  overlooked  in  ana- 
lyzing corporation  reports,  is  whether  fire  insurance  is 
carried  on  the  property.  Not  long  ago  the  Bethlehem 
Steel  Corporation  lost  about  $1,500,000  in  property  be- 
cause of  a  fire  at  its  works  in  South  Bethlehem.  This 
corporation  could  well  stand  the  monetary  loss  con- 
cerned, but  the  loss  might  have  greatly  exceeded  this 
amount.  It  was  certainly  a  mistake  in  management  that 
the  corporation  dropped  its  insurance  policies  September, 
1915,  even  though  it  had  accumulated  a  treasury  surplus 
of  over  $30,000,000  by  that  time. 

A  corporation  such  as  the  F.  W.  Woolworth  Company 
may  well  carry  its  own  insurance  because,  with  hun- 
dreds of  well  separated  properties,  its  risks  are  as  well 
scattered  as  those  of  any  insurance  company  and  its 
fire  losses  will  be  at  least  as  small  as  those  of  an  or- 
dinary insurance  company.  It  can  therefore  save  the 
forty  per  cent,  of  insurance  premiums  which  would  be 
consumed  by  agents'  commissions,  taxes,  expenses  and 
profits  of  insurance  companies.  A  corporation  whose 
plants  are  not  so  widely  scattered  cannot  afford  to  carry 


Fixed  or  Capital  Assets  91 

its  own  insurance.  To  do  so  is  to  take  a  long  chance 
not  consistent  with  conservative  management. 

Is  there  enough  insurance  in  force?  A  well  known 
credit  man  is  quoted  in  a  booklet  issued  by  the  National 
Association  of  Credit  Men :  "Of  the  great  mass  of  prop- 
erty statements  coming  under  my  observation  not  one  in 
fifty  shows  sufficient  insurance  carried." 

Is  the  amount  of  insurance  varied  to  cover  changing 
inventories?  A  common  practice  is  to  strike  an  average 
between  high  and  low  seasonal  inventories,  inadequate 
when  inventories  are  high,  excessive  during  the  dull 
season.  Contrast  with  this  blundering  method  those 
of  such  firms  as  Marshall  Field  &  Co.,  which  keep  a 
perpetual  inventory  of  all  stocks,  employ  special  insur- 
ance experts  to  cancel  or  add  insurance  daily  to  keep 
pace  with  fluctuations  in  insurable  property.  Armour 
&  Co.  have  their  insurance  policies  adjusted  daily.  In 
lines  where  stocks  are  not  subject  to  such  rapid  changes 
monthly  revisions  of  policies  and  amounts  are  found 
advisable. 

Can  there  be  a  more  important  consideration  than 
adequate  fire  insurance?  Do  you  know  what  would  be 
the  effect  of  a  serious  fire  on  the  securities  you  propose 
to  purchase? 

Industrial  companies  are  usually  particularly  subject 
to  severe  loss  by  fire.  A  loss,  of  less  importance  if  con- 
fined to  one  of  several  plants,  may  prove  fatal  if  de- 
stroying the  main  building.  The  physical  loss  may  be 
covered  by  fire  insurance  but  the  loss  of  business  re- 
mains. 


92  How  to  Analyze  Industrial  Securities 

It  is  not  generally  known  that  profits  may  be  insured. 
The  special  form  of  insurance  is  called  "Use  and  Occu- 
pancy" and  compensates  for  loss  of  the  use  of  buildings 
because  of  fire.  Such  insurance  is  available  only  to 
corporations  of  the  highest  reputation  and  stability. 
Sears,  Roebuck  &  Company,  for  example,  with  an  enor- 
mous distributing  plant  in  Chicago,  are  insured  both 
against  the  physical  and  business  losses  of  fire.  Such 
insurance  should  be  considered  a  splendid  bulwark  of 
strength  by  a  prospective  security  holder. 


XIX 

Permanent  Investments 

FOLLOWING  the  plant  and  property  accounts 
come  the  permanent  investments  of  industrial  cor- 
porations. These  may  be  either  investments  made 
out  of  surplus  earnings  and  carried  as  permanent  anchors 
to  windward,  or  represent  securities  of  subsidiary  or 
affiliated  companies.  Such  securities,  of  course,  are  not 
to  be  considered  as  current  assets,  but  are  classed  as 
permanent  or  capital  assets. 

"They  represent  an  excess  of  capital  over  and  above 
that  required  by  the  business,  and  while  they  may  be,  in 
the  majority  of  cases,  easily  convertible  into  cash,  it  is 
only  in  the  event  of  some  extraordinary  circumstances  or 
unusual  demand  that  such  proceeding  takes  place.  They 
seem  to  be  looked  upon  more  in  the  nature  of  fixed  capi- 
tal and  not  as  something  which  is  fluctuating  constantly 
in  conformity  with  the  volume  of  business."* 

When  the  security  holdings  are  large  in  proportion 
to  the  total  assets,  separate  schedules  of  all  the  stocks 
and  bonds  owned  with  prices  paid  and  dividend  and  in- 
terest yield  should  be  shown.  The  securities  must 
be  analyzed  item  by  item  in  order  to  determine  whether 
or  not  they  are  worth  the  value  as  shown  on  the  books. 


*  Wildman. 

(93) 


94  How  to  Analyze  Industrial  Securities 

Many  corporations  have  been  forced  into  financial  dif- 
ficulties because  of  misadventures  of  securities  shown 
on  the  books  at  high  value.  This  is  particularly  true 
in  the  case  of  corporations  issuing  bonds  to  pay  for 
stocks  of  another  company.  If  the  stocks  fail  to  yield 
dividends  the  bonds  issued  in  payment  for  the  stocks 
must  still  pay  interest;  in  other  words,  pay  for  a  "dead 
horse." 

It  is  entirely  proper  to  maintain  securities  held  as 
permanent  investments  at  the  original  cost  price  or  par 
value,  provided,  however,  that  reserve  is  set  up  on  the 
credit  or  liability  side  of  the  balance  sheet  to  offset  any 
depreciation  which  may  occur.  Maintenance  of  any  as- 
set on  the  books  at  cost  price  with  the  reserve  offsetting 
depreciation  thereof  has,  as  explained  before,  the  ad- 
vantage of  exhibiting  conditions  as  they  originally  were 
together  with  necessary  adjustments. 

It  is  not  desirable  that  investments  which  have  appre- 
ciated in  value  be  marked  at  higher  figures  than  cost 
price.  Even  such  master  minds  as  J.  Ogden  Armour, 
John  D.  Rockefeller  and  E.  H.  Harriman  have  made 
lamentable,  almost  ridiculous,  errors  in  acquiring  securi- 
ties. A  present  gain  may  be  a  loss  to-morrow,  and 
safety  lies  in  listing  assets  at  cost  or  less. 

Much  caution  must  be  exercised  in  regard  to  the 
securities  of  subsidiary  and  affiliated  companies  held  by 
a  parent  corporation.  It  is  not  long  since  that  the  West- 
inghouse  Electric  and  Manufacturing  Company  was 
obliged  to  write  off  or  drastically  mark  down  the  book 
value  of  its  investments  in  foreign  electric  holdings. 


Permanent  Investments  95 

That  its  foreign  plant  investments  had  not  been  profitable 
is  indicated  by  the  fact  that  in  the  year  ending-  March 
31,  1914,  over  78  per  cent,  of  its  gross  income  came  from 
its  domestic  manufacturing  business  while  12  per  cent, 
came  from  investments  with  a  book  value  over 
$2,000,000  in  excess  of  the  value  at  which  the  domestic 
plants  were  carried. 

The  possibilities  of  concealment  and  fraud  between 
the  books  of  a  holding  corporation  and  the  books  of  a 
subsidiary  are  almost  unlimited.  The  only  satisfactory 
method  of  analysis  lies  in  the  examination  of  the  reports 
of  each  of  the  subsidiary  corporations,  examining  them 
as  carefully  as  though  their  securities  were  the  ones  pri- 
marily under  scrutiny,  then  analyzing  with  equal  care 
the  books  of  the  parent  corporation,  then  making  an 
analysis  of  an  absolute  consolidation  of  the  accounts  of 
all  the  corporations,  including  those  of  the  parent  com- 
pany. 

The  possibilities  of  misleading  information  are  evident 
from  the  fact  that  the  bills  payable  of  one  of  the  cor- 
porations included  may  be  the  bills  receivable  of  another. 
It  is  easy  to  count  a  debt  of  a  subsidiary  corporation  as 
a  resource  of  the  holding  organization,  but  not  to  count 
it  as  a  liability  of  the  subsidiary  because  of  the  plausible 
reason  that  it  is  not  a  claim  due  outsiders.  Again,  the 
holding  corporation  may  count  as  a  resource  the  notes 
of  the  subsidiary  payable  to  the  holding  corporation  for 
merchandise  and  at  the  same  time  count  as  a  resource 
such  merchandise  in  the  hands  of  the  subsidiary.  It  is 
simple  for  the  holding  corporation  to  sell  goods  to  its 


96  H'ow  to  Analyze  Industrial  Securities 

subsidiary  at  such  prices  as  to  show  a  big  profit  for 
itself  but  at  a  decided  loss  to  the  subsidiary.  If  access 
then  is  not  had  to  the  books  of  the  subsidiary  the  fallacy 
of  the  parent's  prosperity  may  not  be  disclosed  for  several 
years. 

A  great  mercantile  corporation  collapsed.  A  large 
number  of  banks,  which  had  considered  its  paper  gilt 
edged,  suddenly  found  that  notes  payable  to  the  extent  of 
several  million  dollars,  not  shown  on  the  books  of  the 
holding  corporation  or  on  any  statement  of  subsidiaries 
given  to  the  banks,  had  been  issued  and  discounted  by  its 
subsidiaries.  Books  audited  as  suggested  before  and 
signed  by  reputable  public  accountants  would  not 
only  have  disclosed  such  an  unfortunate  situation,  but 
probably  would  have  suggested  in  ample  time  a  remedy 
for  conditions  which  made  such  futile  financing  seem 
expedient. 

In  1901,  before  the  advent  of  the  present  management 
and  the  more  adequate  reports  now  available,  the  United 
States  Rubber  Company  owed  per  published  figures  but 
$1,648,694  in  loans  and  accounts  payable,  an  amount 
exceeded  by  quick  assets.  Very  soon  after,  $12,000,000 
of  bonds  were  issued  to  provide  payment  for  the  press- 
ing obligations  of  subsidiary  corporations.  Comprehen- 
sive figures  showing  the  relations  between  subsidiary  and 
holding  corporation,  together  with  consolidated  accounts, 
will  be  found  in  many  listing  statements  of  the  New 
York  Stock  Exchange,  e.  g.,  statement  of  the  Interna- 
tional Salt  Company. 


XX 

Treasury  Stocks  and  Bonds 

ONE  important  consideration  in  regard  to  treasury 
stock  is  to  ascertain  whether  the  amount  so  listed  is 
in  reality  what  it  purports  to  be.  Some  companies 
include  among  their  current  assets  stocks  or  bonds  which 
have  been  authorized  but  never  sold.  This  is  highly  im- 
proper. Treasury  stocks  or  bonds  are  such  in  actuality 
only  when  they  have  been  issued  for  value  and  repur- 
chased by  the  company  or  donated  to  its  treasury.  Of 
course  the  status  of  the  corporation  would  remain  un- 
changed if  the  treasury  stocks  and  bonds  were  cancelled 
and  burned,  simply  reducing  the  outstanding  capitaliza- 
tion to  this  extent. 

However,  in  many  instances  this  is  not  feasible.  Stock 
issued  is  presumed  to  be  disposed  of  at  par  and  cannot 
be  issued  for  less  without  a  corresponding  liability  to  its 
holder  for  the  difference  between  what  it  is  issued  for 
and  the  par  value.  Treasury  stock  is  presumed  to  have 
been  issued  once  for  par  value  and  therefore  may  sub- 
sequently be  sold  at  any  price  or  given  away  if  desired.* 
Treasury  stocks  or  bonds  would  seem  more  logically  to 
be  carried  as  investments  than  as  current  assets.  Is 
not  the  sale  of  these  treasury  securities  practically  the 
same  as  new  financing? 

*  Wildman. 

(97) 


98  How  to  Analyze  Industrial  Securities 

Securities  held  in  the  treasury  cannot  properly  be 
set  at  par  without  an  offsetting  account  unless  the 
market  quotation  for  the  securities  of  the  same  issues 
outstanding  is  par  or  above.  A  proper  treatment  would 
appear  to  be  to  carry  securities  at  par,  placing  on  the 
credit  or  liability  of  the  balance  sheet  a  reserve  to 
offset  any  possible  inflation  of  value. 

Treasury  stocks  or  bonds  are  usually  acquired  through 
the  action  of  a  sinking  fund  invested  each  year  to  re- 
duce the  amount  of  securities,  more  often  bonds,  out- 
standing. 

However  "treasury  stock"  publicly  offered  by  a  cor- 
poration has  not  usually  been  bought  in  previously  by 
a  company  except  technically.  The  issuance  is  accom- 
plished by  placing  a  surplus  amount  of  the  stock  in  the 
hands  of  the  promoter  or  other  interested  person  for  a 
nominal  consideration.  Then  as  per  prior  agreement 
the  stock  is  donated  back  to  the  company  which  can 
then  legally  market  it  to  the  public.  However,  as  in 
the  cases  of  the  D  &  C  Company  (Food)  and  the 
old  Marconi  Company  reams  of  stock  were  sold  as 
treasury  stock,  while  the  proceeds  went,  not  to  the 
issuing  companies,  but  to  private  individuals.  Xo 
new  moral  is  to  be  drawn  from  such  practice.  There 
simply  seems  to  be  no  limit  to  the  audacity  of  a  certain 
fraternity  of  operators. 


XXI 

Goodwill  and  Organization 

PHILANDER  C.  KNOX  said  something  like  this : 
"Goodwill  is  property  capable  of  being  appraised, 
bought  and  sold.    In  many  cases  it  is  the  main  in- 
gredient of  value.    It  represents  all  the  strength,  industry, 
tact  and  judgment  that  makes  success  in  estimating  the 
worth  of  a  business.     It  is  not  infrequently  reckoned 
more  valuable  than  the  buildings  and  the  machinery  that 
makes  up  the  physical  plant." 

Goodwill  is  simply  the  power  of  attraction  whereby 
the  proprietor  causes  the  buyer  to  seek  him  or  his  place 
of  business  when  in  the  market  for  the  kind  of  goods 
which  the  proprietor  has  for  sale.  The  Goodwill  account 
is  then  logically  a  capitalization  of  the  profit  resulting 
from  business  secured.  Yet  there  are  few  more  baffling 
obstructions  to  clear  analysis  of  corporation  reports  that 
the  Goodwill  account  because  of  its  inclusion  with  the 
Plant  or  Property  account.  The  intangible  asset  of 
Goodwill  may  arbitrarily  be  placed  at  any  figure  what- 
ever. In  fact  such  an  account  as  "Plant,  Goodwill,  etc.," 
may  be  usually  considered  as  consisting  mostly  if  not 
almost  entirely  of  the  latter  items.  Generally  a  corpora- 
tion having  Goodwill  of  actual  value  is  not  at  all 
ashamed  to  set  it  up  for  what  it  actually  is.  The  value 
of  the  Goodwill  of  the  firms  such  as  Marshall  Field  & 

(99) 


100          How  to  Analyze  Industrial  Securities 

Co.,  Steinway  &  Co.,  Victor  Talking  Machine  Company, 
the  General  Electric  Company,  is  enormous,  yet  strange 
to  say  the  companies  having  the  largest  amount  of 
bona  fide  Goodwill  value  are  most  apt  to  place  its  value 
at  $1  or  to  omit  such  an  account  entirely. 

The  creation  of  the  Goodwill  account  usually  occurs 
in  the  recapitalization  of  prosperous  corporations  by 
bankers  or  promoters.  This  was  especially  true  in  the 
latter  part  of  1911  and  the  early  part  of  1912.  One  of 
the  principal  reasons  for  this  was  the  demand  for  7  per 
cent,  industrial  preferred  stocks  for  investment  pur- 
poses to  which  several  banking  houses  catered.  The 
preferred  stocks  represented  the  entire  amount  of  assets, 
while  the  common  stock  represented  Goodwill  or  present 
and  expected  earning  power.  For  example,  when  the 
F.  W.  Woolworth  Company  was  recapitalized  the  real 
assets  were  about  $15,000,000.  Against  this  was  issued 
7  per  cent,  preferred  stock.  The  net  earnings  of  the 
assets  were  sufficient  to  pay  the  7  per  cent,  on  the  new 
$15,000,000  of  preferred  stock  and  leave  nearly  8  per 
cent,  on  the  $50,000,000  common  stock  which  represented 
Goodwill.  As  commonly  known,  this  Woolworth  com- 
mon stock  has  continuously  earned  and  paid  dividends, 
proving  that  the  Goodwill  had  actual  value.  More  often 
Goodwill  simply  represents  capitalization  of  earnings 
hoped  for. 

Peculiar  instances  of  the  capitalization  of  Goodwill 
have  occurred  in  mergers  of  corporations  whose  in- 
dividual net  earnings  have  been  almost  if  not  absolutely 
nil,  this  unfortunate  state  of  affairs  having  been  due  to 


Goodwill  and  Organization  101 

slashing  competition  between  these  companies.  Mer- 
gers effected  by  skillful  and  tactful  promoters  have  sup- 
ported appreciable  amounts  of  Goodwill,  necessary  be- 
cause the  stockholders  of  the  original  companies  would 
not  release  their  holdings  unless  they  received  more  than 
the  physical  value  of  the  properties.  Such  Goodwill 
would  have  as  its  basis  simply  the  value  that  harmony 
of  previously  opposed  interests  might  give. 

Still  another  origin  of  the  Goodwill  account  is  expense 
of  advertising  which  new  firms  are  obliged  to  do  in 
order  to  secure  their  share  of  business.  It  does  not  seem 
improper  that  this  unusual  expense  be  charged  to  a 
Goodwill  account  reflecting  the  extra  cost  of  establish- 
ing the  business.  Of  course  this  capitalized  expense,  in 
deference  to  conservatism,  should  be  distributed  over 
the  future  years  which  should  receive  the  benefit,  being 
annually  reduced  by  charges  against  profits. 

Goodwill  is  usually  considered  an  asset  of  diminish- 
ing value,  and  while  examples  may  be  given  of  corpora- 
tions whose  Goodwill  value  is  constantly  increasing,  yet 
these  same  corporations  will  probably  be  found  to  be 
most  industrious  in  wiping  the  Goodwill  account  from 
their  books.  This  may  be  done  by  setting  aside  surplus 
earnings  to  this  end.  For  example,  the  Goodwill  account 
of  the  United  States  Realty  &  Improvement  Company 
amounted  at  the  close  of  1905  to  $6,300,000.  All  this 
has  been  written  off.  The  American  Cotton  Oil  Com- 
pany carries  in  its  assets  $23,594,870  as  the  amount  of 
Goodwill,  Brands,  etc.  As  a  theoretical  offset,  the  com- 
pany adds  year  by  year  to  its  profit  and  loss  surplus, 


102          How-to  Analyze  Industrial  Securities 

thus  reducing  the  difference  in  the  amounts  of  Good- 
will and- of  surplus.  The  surplus  amounts  to  but  about 
a  half  of  the  Goodwill  account. 


XXII 

Patents,  Trademarks,  Brands,  Rights 

THESE  accounts  have  a  familiar  sound.  Honestly 
expressed  they  are  perfectly  legitimate,  but  gener- 
ally they  represent  a  euphonious  attempt  to  con- 
ceal the  absence  of  assets  of  real  value.  In  other  words, 
they  represent  arbitrary  amounts  of  goodwill  or  "water." 
"Basic"  patents  are  considered  the  most  valuable,  be- 
cause they  cover  a  whole  process  or  large  idea  and  not 
simply  a  minor  detail.  Very  few  true  basic  patents  are 
obtainable  at  this  late  date.  It  is  related  that  one  of 
the  most  profitable  patents  was  issued  for  an  improved 
building  screw,  the  patent  simply  covering  a  screw  with 
a  gimlet  point.  Previous  to  this  screws  had  been  flat  on 
the  end  and  a  hole  had  to  be  drilled  before  insertion. 
The  gimlet  screw  could  be  driven.  It  is  related  that  the 
company  controlling  the  patent  prospered  so  that  it 
literally  scarcely  knew  what  to  do  with  the  money.  Its 
wagons  were  gold  laid,  the  harnesses  emblazoned  with 
gold  and  silver,  and  so  on. 

Naturally  when  a  patent,  trademark,  brand,  or 
right  is  purchased  by  a  corporation  at  a  large  but  fair 
figure,  the  purchase  price  should  be  expressed  in  the 
balance  sheet  under  its  true  name.  No  one  will  doubt 
the  legitimacy  while  it  still  had  years  to  run  of 
a  large  patent  account  in  the  books  of  the  Gil- 
lette Razor  Company.  The  vast  assets  of  the  American 

(103) 


104          Hbw  to  Analyze  Industrial  Securities 

Tobacco  Company  were  founded  on  patents  on  cigarette 
machines.  Who  doubts  the  value  of  patents  of  the  Mer- 
genthaler  Linotype  Company  or  the  Vulcan  Detinning 
Company? 

As  is  well  known,  the  latter  corporation  succeeded 
in  obtaining  $677,352  from  the  American  Can  Com- 
pany because  of  infringement  on  the  Vulcan  Com- 
pany's patented  processes.  Even  more  recently  the 
validity  of  the  "Weed"  tire  chain  was  upheld  and  sev- 
eral prosperous  competing  companies  were  obliged  to 
go  out  of  business. 

When  an  arbitrary  value  is  placed  upon  patents  it  is 
very  apt  to  be  found  that  the  item  consists  chiefly  of  the 
most  intangible  goodwill.  A  more  satisfactory  method 
is  to  capitalize  the  income  reasonably  representing  the 
special  income  for  which  the  patents,  trademarks,  brands, 
rights,  etc.,  can  fairly  be  held  responsible.  Suppose 
a  company  capitalized  at  $1,000,000  earns  as  a  fair 
average  $140,000  a  year.  Suppose  the  typical  firm  in 
the  line  of  business  in  which  the  company  is  engaged — 
the  "Representative  Firm,"  as  economists  call  it — brings 
in  7  per  cent,  profits  on  an  average.  If  the  patents,  trade- 
marks, brands,  or  rights  are  responsible  for  this  excess 
earning  it  would  not  seem  unreasonable  to  capitalize  this 
excess  at  7  per  cent.,  or  $1,000,000.  It  will  be  remem- 
bered that  this  is  the  method  used  in  capitalizing  the 
goodwill  of  the  F.  W.  Woolworth  Company. 

But  patents  are  apt  to  be  vain  things  for  safety. 
Patents  did  not  suffice  to  secure  the  rights  to  manu- 


Patents,  Trademarks,  Brands,  Rights          105 

facture  moving  picture  machines  to  its  inventor,  Mr. 
Edison,  and  after  being  in  the  courts  for  37  years  the 
suit  of  Thomas  A.  "Edison  against  the  Atlantic  &  Pacific 
Telegraph  Company  and  the  heirs  of  Jay  Gould  for  the 
alleged  infringement  of  telegraph  patents  was  thrown 
out  by  the  Supreme  Court  of  the  United  States.  Again 
it  was  only  after  31  years  of  litigation  that  the  American 
Telephone  and  Telegraph  Company  was  forced  to  pay 
the  Western  Union  Telegraph  Company  $5,279,000  for 
the  infringement  of  a  patent.  The  Eastman  Kodak  Com- 
pany waxed  enormously  wealthy,  while  the  inventor  of 
its  principal  product  died  in  comparative  poverty.  The 
widow  of  the  Reverend  Hannibal  Goodwin,  who  invented 
the  photographic  film,  first  received  belated  benefits  of 
her  husband's  inventive  genius  at  the  age  of  81.  The 
litigation  extended  for  eleven  years.  The  patents  cov- 
ering photographic  films  in  all  forms,  including  cartridge 
films,  film  packs  and  moving  picture  films,  were  appar- 
ently, and  after  eleven  years  of  litigation  proved,  valid. 
Yet  the  corporation  which  used  the  patents  made  such 
enormous  strides  in  the  17  years  of  its  infringement  that 
it  was  able  to  pay  the  damages  secured  by  the  bona 
fide  holders  of  the  patents  without  skipping  a  single 
extra  dividend. 

A  patent  is  supposed  to  confer  on  the  patentee  the 
exclusive  right  to  make  and  sell  the  particular  device 
described,  but  does  not  undertake  to  stop  infringement. 
It  is  simply  a  permit  for  its  owner  to  spend  his  own 
money  in  looking  for  people  who  may  begin  making 
devices  similar  to  his  and  bring  suit  in  one  court  after 


106          How  to  Analyze  Industrial  Securities 

another  to  stop  them.  As  is  widely  known,  patents  are 
made  non-effective  by  such  simple  expedients  as  leaving 
out  some  unimportant  part  mentioned  in  the  claims  or 
putting  in  something  different  from  a  part  described. 

Patents  are  usually  of  little  value  unless  the  holder  is 
well  able  to  defend  them  and  to  purchase  other  patents 
as  they  are  issued  so  as  to  hold  a  controlling  power  in 
the  field,  thereby  discouraging  efforts  to  fight. 

In  July,  1910,  the  Allis-Chalmers  Manufacturing  Com- 
pany won  its  suit  on  Patent  No.  546,059  against  the 
General  Electric  Company.  Yet,  while  the  suit  was  in 
progress,  the  business  and  credit  of  the  smaller  corpora- 
tion was  torn  to  pieces  and  never  recovered  until  after 
drastic  reorganization. 

Simply  because  of  its  longer  financial  arm  the  Na- 
tional Cash  Register  Company  was  able  to  wear  out 
weaker  competitors  by  bringing  suits  against  their  en- 
tirely valid  patents. 

Patents  are  issued  for  but  seventeen  years  and  are 
renewable  only  by  a  special  act  of  Congress.  They  are 
therefore  essentially  a  wasting  asset  and  must  be  written 
off  yearly  to  extinction  at  the  end  of  the  legal  period. 
Obviously  the  patents  of  the  Vulcan  Detinning  Company, 
for  example,  are  small  in  value  now  as  compared  with 
their  value  when  first  issued. 

Yet  not  always  do  the  benefits  from  a  patent  expire 
at  the  time  as  does  its  theoretical  exclusive  legal  right. 
The  patent  right  may  create  goodwill  at  least  partially 
offsetting  the  expiration  of  the  patent.  Consider  the 
goodwill  created  by  the  McCormick  Harvester  Company, 


Patents,  Trademarks,  Brands,  Rights          107 

resulting  largely  from  patents  so  enormously  valuable 
that  Congress  refused  to  renew  them.  The  corporation 
into  which  the  McCormick  Harvester  Company  was 
merged  was  organized  without  any  goodwill  or  other 
intangible  assets,  again  giving  an  example  of  conserva- 
tism which  would  seem,  at  least  in  comparison  with  the 
action  of  other  companies,  to  show  an  excess  of  prudence. 
Who  can  question  the  value  of  trademarks  and  brands 
such  as  "Royal"  baking  powder,  "Gold  Medal"  flour, 
"Ford"  automobiles?  When  purchased  for  cash  such 
values  may  very  properly  be  set  up  as  assets.  In  the 
name  of  conservation  careful  managers  will  usually 
gradually  wipe  out  such  intangible  assets  by  annual 
charges  against  earnings. 


XXIII 

Working  and  Trading  Assets 

rr^HE  items  Plant  and  Property,  Investments,  Treas- 
ury Stock  and  Patents,  Trademarks  and  Goodwill 
-•-  have  already  been  taken  up.  In  logical  order  the 
next  account  is  that  of  Working  and  Trading  Assets  or 
Inventories.  The  Inventory  items  consist  of  such  ac- 
counts as  Materials  and  Supplies,  Goods  in  Process, 
Finished  Goods,  Finished  Parts  Purchased  for  As- 
sembling, Packing  Material,  Coal,  Oil  and  Waste,  Sta- 
tionery, Advertising  Matter,  Postage  and  similar  inven- 
tories. 

These  Working  and  Trading  Assets  are  those  con- 
sumed in  the  manufacture  of  the  goods  or  the  conduct 
of  the  business.  In  the  case  of  a  purely  manufacturing 
corporation  the  assets  are  Working  Assets.  Naturally, 
in  the  case  of  a  mercantile  corporation,  corresponding 
assets  would  be  Trading  Assets. 

Quite  generally,  Working  and  Trading  Assets  are  in- 
cluded among  the  Current  Assets,  which  is  the  next  item 
on  the  balance  sheet.  This  practice  does  not  appear  to 
be  entirely  sound,  because  the  Working  and  Trading 
Assets  are  not  such  as  may  be  depended  upon  for  reali- 
zation at  short  notice  without  ruinous  concessions  from 
book  value.  This  the  Rumely  Company  found  at  high 
cost. 

(109) 


110          How  to  Analyze  Industrial  Securities 

It  is  highly  important  to  ascertain  whether  these 
Working  and  Trading  Assets  have  been  inventoried  by 
professional  appraisers  or  reliable  accountants,  or 
whether  the  count  and  valuation  of  the  company's  own 
employees  have  been  taken.  When  the  valuation  is  made 
by  a  reliable  appraisal  corporation,  or  by  a  reliable  firm  of 
public  accountants,  the  items  may  be  taken  at  book  value. 

As  an  example  of  the  work  done  by  reliable  account- 
ing firms,  an  inventory  in  which  the  writer  participated 
may  be  in  place.  At  6  P.  M.,  and  without  warning,  the 
force  of  one  of  the  largest  accounting  firms  of  Chicago 
took  possession  of  a  condensed  milk  factory  near  Chi- 
cago. The  cash  was  counted  immediately,  then  the 
horses,  wagons  and  harness.  The  milk  was  inspected 
and  measured.  The  same  was  done  to  the  vats  of  con- 
densed milk.  The  stock  of  canned  goods  was  then 
counted.  It  was  not  taken  for  granted  that  the  boxes 
in  the  stock  department  were  filled  with  cans  of  con- 
densed milk.  The  boxes  were  opened  and  the  contents 
counted,  an  occasional  can  being  opened  and  the  con- 
tents examined. 

If  such  procedure  is  considered  necessary  in  the  veri- 
fication of  assets  having  such  comparatively  little  bulk 
value  as  condensed  milk,  the  importance  of  checking  up 
inventories  of  corporations  whose  finished  product  is 
higher  priced  articles  of  copper,  brass  or  steel  is  quite 
apparent. 

Not  only  must  quantities  and  qualities  be  checked, 
but  values  of  inventories  must  be  considered.  All  ma- 
terials and  supplies  should  be  inventoried  at  cost.  If 


Working  and  Trading  Assets  111 

the  market  price  is  lower  at  the  time  the  balance  sheet 
is  made  up,  then  a  reserve  to  offset  their  decline  in 
market  value  should  be  placed  on  the  credit  or  liability 
side  of  the  balance  sheet.  This  procedure  shows  at  once 
the  actual  cost  of  materials  and  supplies,  and  determines 
the  loss  if  purchased  at  higher  than  present  market 
value.  A  less  preferable  course  is  to  place  the  inven- 
tories at  the  newer,  lower  market  price,  charging  the 
necessary  deduction  as  a  loss  to  the  business.  The 
United  States  Rubber  Company  in  a  recent  year  charged 
off  as  a  loss  a  decline  in  inventory  value  amounting  to 
about  $1,500,000. 

Inclusion  in  the  price  of  inventories  of  material  and 
supplies  of  the  inward  freight,  cartage,  etc.,  expended  on 
the  goods  still  on  hand  is  entirely  proper.  Not  many 
corporations  exhibit  a  reserve  for  the  depreciation  of 
inventories  in  case  of  a  decline  but,  in  accepted  practice, 
value  inventories  at  cost  or  present  market  price,  which- 
ever is  lower.  This  is  not  open  to  criticism  except  that 
the  balance  sheet  will  not  then  show  if  undue  losses  have 
been  sustained  through  depreciation  in  market  value. 

By  no  means  should  inventories,  purchased  at  lower 
than  present  market  prices,  be  increased  as  the  specula- 
tive prices  advance.  In  1906  copper  was  26c  a  pound; 
within  a  few  months  it  dropped  to  lie.  Companies  who 
inventoried  their  copper  supplies  bought  at,  say,  16c,  at 
the  maximum  price  of  26c,  placed  themselves  in  a  dan- 
gerous position  when  the  price  abruptly  fell. 

It  would  appear  that  at  times  of  evident  and  exuberant 
prosperity  and  inflated  prices,  ample  reserves  might  with 


112         How  to  Analyze  Industrial  Securities 

propriety  be  set  up  on  the  liability  side  to  offset  the 
decline  in  materials  and  supplies  which  will  most  cer- 
tainly appear  sooner  or  later,  and  at  a  time  when  stocks 
of  raw  matenals  will  probably  be  as  large  as  they  are 
now. 

Goods  in  Process  valuation  consists  of  raw  material 
plus  the  labor  so  far  expended  and  part  of  the  overhead 
charges.  Only  expert  appraisers  are  qualified  to  attest 
to  such  values,  as  they  are  special  to  each  separate  busi- 
ness. 

Finished  Goods  valuations  consist  of  raw  material  plus 
labor,  manufacturing  overhead  cost,  and  by  some  it  is 
considered  wise  to  include  the  overhead  charges  for  ad- 
ministration, advertising,  selling,  etc.  The  inclusion  of 
the  latter  items  seems  questionable.  Not  a  few  large 
corporations  carry  their  Finished  Goods  not  only  as  high 
as  full  selling  cost,  but  at  selling  price,  anticipating  mar- 
kets and  profits  which  may  never  materialize.  Such  pro- 
cedure is  entirely  indefensible. 

The  more  nearly  some  inventories  are  in  the  shape  of 
raw  materials,  the  more  likely  they  are  to  liquidate  at 
full  value,  because  styles  and  fads  are  less  apt  to  render 
raw  materials  unserviceable. 

Another  consideration  in  regard  to  inventories  is  some- 
times of  importance.  Are  the  inventories,  if  booked  at 
cost  price,  shown  to  include  or  exclude  discounts?  If 
the  discounts  are  not  taken  off  it  would  follow  that  the 
company  poorly  managed  or  financed  would  make  a  bet- 
ter showing  of  inventories  than  the  one  which  showed 
them  at  the  same  cost  price,  with  the  discount  eliminated. 


Working  and  Trading  Assets  113 

Complications  sometimes  arise  in  the  inventories  of 
holding  companies,  because  of  profits  claimed  on  the 
books  of  subsidiaries,  which  have  worked  upon  material. 
Only  a  consolidated  balance  sheet  with  inter-company 
profits  eliminated  would  clearly  demonstrate  the  true 
status. 


XXIV 
Current  Assets 

CURRENT  Assets,  popularly  called  Quick  Assets, 
are  supposed  to  include  only  such  as  will  soon 
become  available  in  cash  for  the  purpose  of  meet- 
ing debts  which  become  due  in  equally  short  time. 

Every  item  of  Current  Assets  is  open  to  question  until 
absolutely  verified.  Even  the  Cash  may  include  "Cash 
Items";  in  other  words,  I.  O.  U.'s  of  doubtful  value. 
The  Accounts  and  Notes  Receivable  may  not  be  worth 
their  face  value  by  any  means.  In  fact,  nearly  all  cor- 
porations ought  to  set  aside  a  reserve  on  the  credit  or 
liability  side  of  the  balance  sheet  as  a  "Reserve  for  Bad 
Debts."  Of  course  the  cash  should  be  separated  from 
the  Notes  and  from  the  Accounts  Receivable,  though  all 
three  are  lumped  in  more  balance  sheets  than  one. 

In  most  corporations  the  Accounts  Receivable  are 
more  liquid  and  certain  than  are  the  Notes  Receivable, 
because  a  debt  usually  becomes  a  Note  Receivable  only 
when  it  becomes  overdue  as  an  account.  Naturally  an 
overdue  obligation  is  normally  not  as  good  as  one  of 
current  standing.  Here,  as  elsewhere,  principles  should 
not  be  laid  with  too  much  assumption.  In  the  agricul- 
tural implement  business,  for  instance,  Notes  Receivable 
are  normally  very  large  in  amount  because  notes  are 
taken  from  agents  and  from  farmers  in  payment  for  im- 

(115) 


116          How  to  Analyze  Industrial  Securities 

plements  as  a  regular  policy.  In  other  lines,  conducted 
on  a  cash  basis,  for  example,  the  5  and  lOc  stores,  neither 
Accounts  nor  Notes  Receivable  are  a  factor. 

Drafts  and  Notes  Receivable  usually  draw  interest 
from  date  of  making.  As  probably  a  large  number  of  these 
drafts  and  notes  have  been  running  for  some  time,  though 
the  principal  is  not  due  at  the  time  of  making  up  the 
balance  sheet,  a  considerable  amount  of  interest  has 
accrued  to  the  benefit  of  the  corporation.  This  is  styled 
Accrued  Interest  on  Drafts  and  Notes  Receivable.  Many 
corporations  do  not  separate  the  interest,  but  combine 
principal  and  accrued  interest  as  Drafts  and  Notes  Re- 
ceivable and  Interest. 

Bonds  owned  as  Investments  or  in  the  Current  As- 
sets may  pay  interest  at  different  times.  If  any  interest 
is  accrued  but  not  paid  at  Balance  Sheet  time,  the  ac- 
count is  naturally  labeled  Accrued  Interest  on  Bonds 
Owned. 

Dividends  on  stocks  owned  are  not  legally  considered 
as  an  asset  until  they  are  declared  by  the  board  of 
directors.  As  soon  as  declared  they  are  a  legal  liability 
of  the  corporation  intending  to  pay  them.  As  soon  as 
dividends  are  declared  on  stocks  owned  they  become 
Current  Assets. 

In  the  case  of  a  holding  company  only  a  consolidated 
balance  sheet  with  inter-company  Current  Liabilities  and 
Current  Assets  eliminated  can  make  the  actual  truth 
known,  as  has  been  stated  before.  Suppose  the  parent 
company  needs  cash  and  a  subsidiary  gives  a  note  which 
the  parent  discounts  at  the  bank.  This  is  not  an  un- 


Current  Assets  117 


questionable  form  of  Quick  Asset,  yet  it  may  appear 
very  plausible  on  the  books  of  the  holding  company.  On 
the  other  hand,  a  subsidiary  company  may  be  in  difficul- 
ties, and  the  parent  advances  the  funds  needed,  taking 
in  return  the  subsidiary's  notes.  The  subsidiary  may  or 
may  not  be  able  to  pay  them  back. 

An  important  account  among  the  Current  Assets  of 
many  corporations  is  Securities.  Securities  purchased 
for  permanent  investment  should,  as  before  stated,  be 
placed  among  the  Capital  Assets.  Only  those  should 
be  considered  as  Current  Assets  which  have  been  ac- 
quired with  funds  not  needed  in  the  regular  conduct  of 
business — securities  purchased  to  keep  idle  funds  pro- 
ducing returns. 

Of  course  a  schedule  of  these  securities  should  be 
shown,  and  the  basis  of  valuation  given.  They  should 
be  highly  marketable,  as  their  inclusion  in  Current  As- 
sets would  admit  no  slow  market  securities.  The  pre- 
ferred method  of  valuation  would  be  at  cost  price,  with 
a  reserve  on  the  credit  or  liability  side  of  the  ledger  to 
provide  for  depreciation  in  value,  if  any,  since  purchase. 
This  method  would  make  possible  easy  analysis  as  to  the 
profit  or  loss  on  the  purchase.  A  large  number  of  cor- 
porations which  have  recently  been  phenomenally  suc- 
cessful because  of  "war  orders"  have  placed  part  of  their 
profits  in  securities,  bought  at  present  high  prices,  and 
listed  among  Current  Assets.  These  securities  will  need 
scrutiny  in  the  future,  when  the  financial  and  business 
outlook  may  not  be  so  bright  as  it  is  at  present. 


XXV 

Sinking  Funds 

SINKING  Funds  are  accumulations  of  capital  set 
aside  in  order  to  meet  obligations  maturing  in  the 
future.  Such  obligations  often  have  indentures 
providing  that  certain  amounts  be  set  aside  annually, 
which  at  compound  interest  will  equal  the  maturing  debt. 
These  amounts  may  be  set  aside  in  cash  and  be  placed 
in  the  company's  treasury,  or  preferably,  in  the  hands  of 
the  trustees  of  the  bonds ;  usually  a  trust  company.  The 
Sinking  Fund  may  be  invested  in  securities,  selected  by 
officials  of  the  corporation,  or  by  the  trustee,  if  the  inden- 
ture so  provides. 

A  Sinking  Fund  in  cash  accumulating  in  a  corpora- 
tion's treasury  for  a  number  of  years  is  ofttimes  liable 
to  prove  a  source  of  temptation  to  the  officials.  It  is 
supposedly  set  aside  in  order  to  take  care  of  one  par- 
ticular debt.  If  kept  at  the  disposal  of  the  company  dur- 
ing all  the  years  intervening  between  the  first  payment 
into  the  Sinking  Fund  and  the  maturity  of  the  debt, 
more  than  one  time  of  stringency,  more  than  one  time 
of  unusual  apparent  speculative  possibility  will  appear, 
when  the  cash  in  the  Sinking  Fund  may  prove  too  great 
a  temptation  and  its  use  changed  from  its  intended  pur- 
pose. This  has  been  experienced  in  countless  cases,  tak- 

(119) 


120         How  to  Analyze  Industrial  Securities 

ing  a  charitable  view  as  to  the  disappearance  of  the  Sink- 
ing Fund. 

A  better  method  is  that  the  indenture  of  the  bond 
provide  that  the  Sinking  Fund  payments  be  made  to  a 
trust  company  as  trustee,  which  shall  each  year  use  the 
Sinking  Fund  cash  paid  in  to  purchase  bonds  in  the 
open  market,  reducing  by  this  much  annually  the 
amount  of  debt  outstanding  of  the  corporation. 
These  bonds  may  then  be  destroyed.  Sometimes  the 
purchased  bonds  are  "kept  alive"  in  the  company's 
treasury  and  interest  paid  on  them.  Nothing  is  gained 
by  this  procedure,  unless  the  accruing1  interest  is  added 
to  the  fund,  and  the  danger  of  possible  conversion  is  an 
argument  against  this  practice. 

In  any  event  the  Sinking  Fund  should  represent  cash, 
or  securities  purchased  with  the  cash.  If  in  cash,  its  lo- 
cation and  guardianship  should  be  known.  If  repre- 
sented by  securities,  a  schedule  of  the  Sinking  Fund  as- 
sets should  be  presented,  with  purchase  and  present 
market  price. 

The  United  States  Steel  Corporation  and  subsidiaries 
had  retired  through  Sinking  Fund  operations  at  the 
end  of  1918  some  $117,913,000  of  bonds,  which  bonds  are 
held  alive  in  the  Sinking  Fund  and  the  interest  applied 
to  the  redemption  of  additional  bonds.  In  1918  this 
accruing  interest  amounted  to  $5,620,211,  as  compared 
with  the  fixed  annual  Sinking  Fund  payments  from 
earnings  of  $6,002,555.  Thus  a  steadily  increasing 
amount  of  bonds  is  redeemed  each  year.  For  instance, 
the  annual  Sinking  Fund  charge  for  the  first  collateral 


Sinking  Funds  121 


5s  is  $3,040,000,  while  $5,623,000  of  those  bonds  were 
redeemed  in  1918. 

It  has  become  common  practice  for  corporations  to 
establish  Insurance  Funds  for  the  protection  of  their 
property  against  fire  and  other  dangers.  The  economies 
of  dispensing  with  regular  fire  insurance  has  already  been 
discussed.  When  established,  the  Insurance  Fund 
should  be  in  cash  or  in  marketable  securities.  If  in  the 
latter  a  schedule  of  their  content  should  be  shown. 

Pension  Funds  are  funds  set  aside  to  provide  pen- 
sions for  employees  who  have  grown  old  in  the  ser- 
vice. Increasing  numbers  of  corporations  are  taking  up 
such  action  both  from  an  altruistic  and  from  a  hard 
business  point  of  view.  As  with  all  other  funds,  the 
amount  should  be  in  cash  or  in  marketable  securities. 

Insurance  and  Pension  Funds  are  not  to  be  con- 
sidered free  assets  of  the  business.  They  are  counter- 
balanced, in  fact,  if  not  on  the  books,  by  a  probable  loss 
in  the  case  of  the  Insurance  Fund  and  by  a  certain  future 
liability  in  the  case  of  the  Pension  Fund. 


XXVI 

Deferred  Assets 

DEFERRED  Assets,  sometimes  called  Deferred 
Charges  to  Expense,  are  neither  quick  nor  capital 
assets.  In  fact,  part  of  them  are  largely  "assets 
by  courtesy."  Deferred  Assets  include  prepaid  expense 
charges.  Insurance  expenses,  for  example,  are  normally 
paid  by  the  year.  Suppose  the  annual  premium,  $5,000,  is 
paid  June  1  and  the  balance  sheet  is  made  up  December 
31.  Obviously,  insurance  is  paid  for  till  the  following 
June,  and  the  entire  $5,000  should  by  no  means  be 
charged  to  expense  by  December  31.  The  proper  way 
would  be  to  set  up  an  account,  which  is  considered  an 
asset  account,  Insurance  Paid  in  Advance.  Then  each 
month  a  twelfth  part  of  this  insurance  premium  payment 
is  charged  up  to  expense:  Insurance.  On  December  31, 
half  of  the  $5,000  would  properly  be  charged  to  the  ex- 
pense Insurance  account  and  half  be  left  to  be  charged 
off  in  the  coming  six  months.  The  $2,500  remaining  in 
the  Insurance  Paid  in  Advance  account  would  be  placed 
in  the  balance  sheet  as  a  Deferred  Asset.  Of  course,  in 
case  of  forced  liquidation  on  December  31,  not  all  of 
this  $2,500  would  be  refunded  by  the  insurance  company, 
which  would  prune  the  amount,  because  the  rate  for  six 
months  is  higher  than  for  the  full-year  period.  Yet  the 
balance  sheet  as  a  w*hole  is  considered  to  represent  "go- 

(123) 


124         How  to  Analyze  Industrial  Securities 

ing  concern"  values,  and  Insurance  Paid  in  Advance  is 
surely  to  be  valued  at  regular  period  rates.  Rent  Paid  in 
Advance  and  Taxes  Paid  in  Advance  are  other  similar 
accounts  which  are  assets  to  the  extent  that  they  are  pre- 
paid at  the  time  the  balance  sheet  is  made  up,  by  the 
same  reasoning  as  applies  to  Insurance  Paid  in  Advance. 

The  benefits  of  Organization  Expense,  at  least  theo- 
retically, extend  over  a  number  of  years.  This  seems  to  be 
as  logical  as  that  the  expense  of  building  superintendence 
is  rightfully  included  in  cost  and  therefore  in  the  asset 
Plant  and  Buildings  after  the  plant  of  a  corporation 
is  constructed.  Therefore  it  is  common  practice  to  cre- 
ate an  account  Organization  Expense  at  the  time  of  the 
beginning  of  the  career  of  a  new  corporation.  This  is 
normally  decreased  each  year  by  writing  off  part  of  the 
amount  to  Profit  and  Loss.  At  the  end  of  ten  years  the 
account  is  usually  entirely  written  off.  Its  convertibility 
as  an  asset  may  in  instances  be  open  to  argument,  but 
in  case  of  large  Organization  Expense  there  seems  to  be 
no  reason  why  this  expense  should  be  entirely  charged 
to  Profit  and  Loss  the  first  year. 

Theoretically,  moving  a  plant  from  one  place  to  an- 
other more  economically  fitted  to  the  corporation's  pur- 
poses may  constitute  an  expense  of  sufficient  resulting 
benefit  to  the  company  to  be  called  a  Deferred  Asset  ac- 
count Moving  Expenses,  and  to  be  written  off  from 
Profit  and  Loss  only  over  a  number  of  years.  Usually 
this  practice  is  frowned  upon.  It  is  well  to  know  that 
such  accounts  are  frequently  found  to  be  the  founda- 
tion of  the  account  in  the  balance  sheet  Deferred  Charges 


Deferred  Assets  125 


to  Expense,  especially  when  no  schedule  is  given  to  sup- 
port the  balance  sheet  account. 

The  1914  annual  report  of  the  Loose-Wiles  Biscuit 
Company  exhibited  an  account  "Deferred  Charges  to 
Future  Operations"  amounting  to  $391,292.  The  ac- 
count is  explained  to  include  "prepaid  insurance,  interest, 
etc.,  balance  of  special  publicity  expenses,  and  the  net 
operating  outlay  incidental  to  the  initial  operation  of  the 
New  York  bakery." 

It  is  not  orthodox  to  treat  any  operating  expenses  as 
assets.  These  "assets"  may  or  may  not  have  been  a  very 
large  part  of  the  $391,292.  The  accountants  who  certi- 
fied to  the  report  sidestepped  responsibility  by  stating 
that  the  Deferred  Charges  to  Future  Operations  repre- 
sented outlays  which,  in  the  opinion  of  the  directors,  were 
reasonably  and  properly  chargeable  against  future 
profits.  By  the  end  of  1918  the  company  had  reduced  the 
Deferred  Charges  to  $118,635. 

In  taking  over  properties  legal  expenses  may  be  in- 
curred in  large  amount.  The  benefits  of  this  expense 
may  fairly  apply  over  a  series  of  years.  Where  so 
handled,  a  Legal  Expense  Deferred  account  is  established, 
which  is  written  off  to  Profit  and  Loss  from  year  to 
year. 

The  unusual  expense  of  Advertising  necessary  to  new 
firms  in  some  lines  of  business  is  sometimes  included  in 
the  Goodwill  account.  Other  firms  create  a  separate  ac- 
count, as  a  Deferred  Asset,  charging  off  to  Profit  and 
Loss  a  goodly  proportion  of  the  amount  each  year. 

Advances  to  Subsidiaries  as  loans  for  expansion  or  for 


126          How  to  Analyze  Industrial  Securities 

paying  interest  before  earnings  are  developed  is  a  com- 
mon account  which  should  be  placed  among  the  De- 
ferred Assets,  and  not  among  the  Current  Assets. 
Whether  the  asset  will  be  deferred  permanently  will 
depend  upon  the  future  of  the  subsidiary.  If  the  amount 
is  large,  further  investigation  is  indicated. 

Discount  on  Bonds  is  an  account  arising  from  the 
sale  of  a  corporation's  bonds  at  a  discount  from  par. 
Suppose  $1,000,000  twenty-year  5%  bonds  are  sold  at 
92.  Obviously  the  proceeds  would  be  $920,000,  while 
full  $1,000,000  must  be  paid  at  maturity.  If  the  entire 
$80,000  discount  is  charged  to  Profit  and  Loss  the  first 
year,  the  annual  report  will  show  a  material  loss,  not  en- 
tirely justified  by  facts,  because  probably  the  company 
could  have  sold  twenty-year  6%  bonds  at  par,  involving 
no  discount.  It  is  quite  proper,  then,  to  set  up  the 
$80,000  Discount  on  Bonds  as  a  Deferred  Asset,  writing 
off  the  account  during  the  period  the  bonds  run — twenty 
years.  Unfortunately  many  corporations  have  added  the 
discount  on  bonds  to  the  Plant  or  Land  and  Building 
account.  The  fact  that  this  has  been  common  practice 
is  simply  another  short  reason  for  skepticism  regarding 
accounts  that  are  not  fully  itemized  and  verified. 

Discount  on  Capital  Stock,  arising  from  the  sale  of 
stock  at  a  discount  from  par.  This  discount  is  usually 
carried  as  Goodwill,  though  it  would  seem  better  prac- 
tice to  set  it  up  as  a  special  account  among  the  "assets 
by  courtesy." 


PART  V 
BALANCE  SHEET— CREDIT 


XXVII 

Bond  Limitation 

THE  conventional  balance  sheet,  as  exemplified  by 
the  form  given  on  page  77  shows  the  capital  stock 
at  the  head  of  the  credit  side  of  the  balance  sheet. 
For  the  present,  capital  stock  will  be  ignored  in  favor  of 
funded  liabilities  because  of  convenience  in  discussing 
the  form  of  capitalization. 

Every  one  of  the  first  large  industrial  corporations 
was  forced  by  competitive  conditions.  Owners  of  many 
plants  afterwards  merged  were  overjoyed  at  an  oppor- 
tunity to  turn  in  their  properties  at  inflated  figures,  se- 
cure cash  and  prior  lien  securities  in  a  newly  promoted 
corporation,  and  retire  to  quiet  life.  Those  were  the 
halcyon  days  of  careless  finance.  Bonds  were  issued 
not  only  for  property  absorbed  but  even  for  promoters' 
profits,  making  a  fixed  charge  of  the  expected  economies 
of  large  scale  productions — and  watered  bonds.  Un- 
wieldy financial  structures  such  as  the  National  Cordage 
Company,  the  National  Asphalt  Company  and  the  United 
States  Shipbuilding  Company  collapsed.  The  present 
generation  of  security  purchasers  may  analyze  the  cause 
of  the  decline  and  fall  of  the  great  corporations  which 
have  gone  before,  and  easily  trace  the  path  which  leads 
away  from  safety. 

(127) 


128          How  to  Analyze  Industrial  Securities 

In  the  first  epidemic  of  consolidation,  corporations 
were  capitalized  on  the  basis  of  expected  earnings  in  the 
years  of  greatest  prosperity.  A  corporation  may  exist 
indefinitely  if  its  capitalization  be  represented  in  common 
stock,  because  returns  are  not  obligatory,  but  ordinary 
bond  charges  are  absolute.  A  deviation  from  expected 
returns  of  operation  because  of  the  depression  period  of 
the  cycles  in  which  general  business  labors  and  a  collapse 
occurs.  This  seems  so  elementary  as  to  need  no  proof, 
yet  hundreds  of  millions  of  dollars  have  been  sacrificed 
by  investors  because  they  had  not  learned  this  simple 
truth.  The  careful  investor  may  learn  it  for  himself, 
never  to  forget,  if  he  will,  and  at  the  expense  of  other 
people's  fortune  breaking  experience. 

Take  for  example  the  Allis-Chalmers  Company.  It 
struggled  along  for  years  under  the  burden  of  a  fixed 
charge  on  $11,148,000  bonds  which,  besides  interest, 
carried  a  sinking  fund  requirement  and  finally  suc- 
cumbed. Having  changed  the  form  of  its  capitalization 
so  that  it  is  able  to  conserve  its  earnings,  it  is  now  on 
the  path  to  prosperity. 

Most  large  corporations  now  doing  business  without 
direct  court  management  are  capitalized  on  more  con- 
servative lines  than  most  of  those  organized  during  the 
first  period  of  consolidation.  Some  of  them  were  created 
differently.  Others,  such  as  the  Maxwell  Motor  Com- 
pany, have  had  their  present  form  thrust  upon  them  by 
voluntary  or  involuntary  reorganization. 

To  be  sure,  many  of  the  best  industrial  corporations 
have  issues  of  bonds.  As  a  rule,  however,  a  large  bond 


Bond  Limitation  129 


issue  is  a  caution  sign.  The  United  States  Steel  Cor- 
poration always  has  had  large  issues  of  bonds,  and  at 
present  the  corporation's  financial  strength  seems  as- 
sured— but  for  many  years  the  future  was  a  grave  ques- 
tion. 

If  a  business  is  one  of  comparatively  steady  income, 
bonds  may  be,  as  a  medical  practitioner  says,  "indicated.'* 
Normally  a  prior  lien  on  the  earnings  and  assets,  they 
carry  less  risk  to  the  security  holder  and  consequently 
less  income  than  other  forms  of  capitalization.  Bonds 
enable  the  common-stock  holder  to  "trade  on  the  equity" 
— using  at  a  profit  borrowed  funds. 

Suppose  a  business  has  $500,000  1st  mortgage  5% 
bonds  and  $100,000  common  stock.  Now,  suppose  the 
earnings  on  the  $600,000  invested  are  8%.  Paying 
$25,000  required  for  interest  on  the  $500,000  bonds 
would  leave  $23,000,  or  23%  on  the  $100,000  capital 
stock,  instead  of  the  8%  which  would  have  been  shown 
without  the  more  easily  satisfied  bonds. 

Yet  the  advantage  may  be  more  apparent  than  real. 
Bondholders,  to  be  lightly  dismissed  in  times  of  pros- 
perity, hold  the  fearsome  "mortgage  on  the  farm"  when 
times  of  adversity  come.  Were  the  net  income  to  drop 
from  $48,000  to  $25,000  the  bondholders'  requirements 
would  be  but  barely  met,  and  any  decline  from  $25,000 
would  be  a  serious  matter  unless  the  corporation  was 
well  fortified  with  cash.  Large  bond  issues  have  there- 
fore proved  the  undoing  of  more  than  one  promising 
industrial.  Perhaps  the  most  obvious  lesson  of  the 
past  two  decades  of  corporation  finance  and  the  one 


130         How  to  Analyze  Industrial  Securities 

learned  at  the  highest  cost  is  that  as  far  as  solvency  is 
concerned  an  industrial  corporation  depends  upon  the 
form  of  its  capitalization  and  not  its  amount.  Stock- 
holders, even  cumulative  preferred  stockholders,  may  be 
pacified,  or  grimly  told  to  wait  until  strength  of  treasury 
justifies  capital  return.  Bondholders  will  not  wait.  They 
demand  their  pound  of  flesh  and  become  the  source  of 
control  in  case  of  reorganization. 

An  industrial  corporation  cannot  soundly  be  financed 
like  a  railroad  by  enlisting  new  borrowed  capital  for  a 
very  large  part  of  extensions.  It  must  pay  for  its  new 
plants  and  improvements  largely  out  of  earnings,  and 
must  supply  itself  with  funds  in  the  same  way  in  order 
to  place  its  securities  upon  a  sound  basis.  This  is  true 
because  a  large  part  of  its  so-called  permanent  assets 
have  little  permanent  value,  whereas  those  of  a  railroad 
do  have  permanent  value.  The  values  in  industrial  plants 
are  not  permanent,  partly  because  the  plants  themselves 
must  so  rapidly  and  continually  be  improved  in  order 
to  cater  to  the  changing  demands,  as  iron  and  steel  con- 
sumers for  example;  and  partly  because  these  plants, 
if  the  owning  company  ever  becomes  insolvent,  are  often 
but  little  more  than  junk.  On  the  contrary,  a  piece  of 
railroad  property  sold  under  the  hammer  will  bring  al- 
most all  it  actually  cost.  The  business  of  a  railroad  may 
rise  or  fall  with  the  times,  but  it  can  never  wholly  van- 
ish, whereas  the  business  of  an  industrial  concern  can 
and  often  does  vanish,  as,  for  instance,  a  number  of  once 
flourishing  automobile  companies.  It  is  because  of  these 
differences  that  thoroughly  sound  industrial  companies 
should  conserve  their  earnings  and  borrow  sparingly. 


Bond  Limitation  131 


Times  of  prosperity  such  as  1915,  1916  and  1919,  most 
promising  in  outlook,  prove  times  of  temptation  to 
corporation  managers.  Now  only  the  silver  linings  of 
the  clouds  are  seen,  and  the  future  promises  unlimited 
numbers  of  fat,  juicy  orders.  New  plants  are  planned, 
new  equipment  ordered,  and  all  at  prices  which  would 
seem  exorbitant  in  ordinary  times.  Perfectly  proper 
proceedings,  these,  if  orders  accepted  on  an  abnormal 
price  basis  will  assuredly  prove  so  remunerative  that  the 
profits  pay  for  the  expansion.  To  plan  extensions  on 
borrowed  money  to  accommodate  business  risen  beyond 
the  limits  of  reason,  at  exorbitant  prices  of  labor  and 
material,  appears  to  be  a  questionable  policy. 

Cycles,  in  business  and  finance,  still  run  their  course, 
and  the  depression  certain  to  follow  a  "fool's  paradise" 
may  prove  drastic  and  drawn  out.  The  dollars  should 
be  kept  in  reserve,  ready  for  service  on  the  firing  line, 
instead  of  being  dissipated  in  large  dividends  or  tied  up 
in  plant  assets  which  are  not  only  unused,  but  a  financial 
burden  in  times  less  prosperous. 

In  the  public  utility  field,  telephone  and  power  corpora- 
tions are,  as  classes,  particularly  luminous  examples  of 
corporations  luxuriating  in  even-keeled  progress  of  earn- 
ings and  profits.  Telephone  and  power  corporations 
may  issue  bonds  drawing  on  earnings  to  a  larger  extent 
than  can  a  corporation  engaged,  for  example,  in  erecting 
office  and  hotel  buildings.  To  be  of  any  security  to 
investors  and  to  avoid  a  painful  resemblance  to  the 
biblical  action  of  a  millstone,  the  bond  issue  of  any  cor- 
poration should  be  supported  by  sustained  earnings, 


132         How  to  Analyze  Industrial  Securities 

proving  for  several  consecutive  years  a  liberal  amount 
over  interest  requirements. 

The  customary  business  depression  cuts  off  about  50  % 
of  the  average  industrial  corporation  income  available 
for  return  on  bonds  and  stocks.  Funded  debt  must 
therefore  be  carefully  limited  to  the  proved  possibilities 
of  earnings.  Net  earnings  for  the  past  five  years,  in- 
cluding the  present,  should  be  at  least  double  the  total 
interest  charges.  If,  then,  the  net  earnings  have  been 
$210,000,  $201,000,  $150,000,  $215,000,  $300,000,  bond 
interest  would  amount  to  but  $75,000,  half  the  net  earn- 
ings of  the  least  prosperous  year.  At  5%,  $75,000  would 
pay  interest  on  $1,500,000,  quite  enough  interest-bearing 
debt,  it  would  seem,  for  an  industrial  with  net  earnings 
ranging  from  $150,000  to  $300,000.  Such  limitation 
would  add  greatly  to  credit.  Further  capital  require- 
ments could  well  be  met  from  profits  and  increase  in 
capital  stock. 

That  the  obvious  advantage  of  trading  on  the  equity, 
i.  e.,  benefiting  through  the  use  of  capital  borrowed  at 
comparatively  low  rates,  is  not  always  essential  is  proven 
by  the  success  of  corporations  such  as  most  of  the 
Standard  Oil  companies  and  the  Ford  Motor  Company, 
which  do  not  have  even  preferred  stock.  These  have 
financed  themselves  out  of  earnings  and  have  attained 
apparently  unassailable  financial  strength. 

The  Singer  Sewing  Machine  Company  also  has  a 
simple  system  of  finance — $60,000,000  in  common  stock. 
The  Mergenthaler  Linotype  Company  has  $12,786,700 


Bond  Limitation  133 


common  stock,  no  preferred  stock,  no  bonds.  Such  or- 
ganizations are  of  "safety  first"  character.  The  com- 
mon stock  has  as  its  equity  the  total  valuation  of  the 
property,  less  floating  dfcbt. 

Most  of  the  corporations  recently  organized  or  re- 
capitalized have  been  promoted  without  bonds.  Ex- 
amples are  the  Kresge  and  McCrory  5  and  10  cent 
stores.  In  fact,  a  large  number  of  corporations  have 
in  recent  years  been  organized  on  a  basis  of  common 
stock  only. 

A  common  form  of  capitalization  is  with  one  class 
stock  of  no  par  value.  For  example,  the  Lee  Rubber 
and  Tire  Company  has  150,000  such  shares.  Besides 
legal  advantages  in  meeting  taxation  laws  such  stocks 
avoid  even  the  appearance  of  coincidence  of  par  with 
physical  or  book  valuation  and  so  help  focus  attention 
to  the  company's  tangible  and  earning  values. 

As  illustrating  the  recognized  necessity  to  curb  un- 
wieldly  industrial  issues  the  bond  provisions  of  Armour 
&  Company  and  of  the  National  Enameling  &  Stamp- 
ing Company  are  interesting.  The  strength  of  the  Gen- 
eral Electric  bonds  is  also  notable. 

Armour  &  Company  have  outstanding  $50,000,000  real 
estate  first  mortgage  4l/2  per  cent,  bonds.  The  mortgage 
provides  that  the  unincumbered  quick  assets  of  the  com- 
pany and  its  auxiliary  companies  shall  at  all  times  exceed 
the  aggregate  debt  of  the  company  and  auxiliary  com- 
panies, including  the  outstanding  bonds  of  this  issue. 

The  National  Enameling  and  Stamping  Company  had 
at  last  report  outstanding  $2,315,000  refunding  first 


134  How  to  Analyze  Industrial  Securities 

mortgage  real  estate  sinking  fund  5's  which  provide  that 
the  liquid  assets  of  the  company  must  equal  the  aggregate 
debts  including  outstanding  bonds  of  this  issue. 

The  General  Electric  Company  has  authorized  $75,- 
000,000  of  5  and  6  per  cent,  debenture  (unsecured)  bonds. 
During  the  fourteen  years  to  1920,  earnings  for  the  stock 
were  never  less  than  $4,802,252,  the  figure  for  1910.  This 
year  of  lowest  earnings  showed  over  1  and  l/4  times  the 
interest  requirements  of  all  these  bonds  authorized.  Dur- 
ing the  past  eight  years  no  year  has  shown  total  authorized 
bond  interest  earned  less  than  three  times.  Moreover, 
only  $25,000,000  of  the  bonds  have  been  issued.  The 
stock  of  the  General  Electric  Company  amounts  to  about 
$140,000,000,  which  at  a  fair  average  price  of  as  low  as 
$140  per  share  provides  an  equity  back  of  its  debts  of 
about  $196,000,000.  The  company  has  only  $2,047,000 
other  bonds  outstanding. 

As  funded  debt  is  usually  considered  all  indebtedness 
maturing  in  more  than  a  year,  included  therefore  with 
bonds  are  short-term  bonds  or  notes.  Obligations  com- 
ing due  within  five  years  are  usually  called  notes,  no 
matter  whether  secured  or  unsecured.  Short-term  ob- 
ligations are  issued  most  often  either  to  bridge  a 
financial  requirement  considered  only  temporary,  or 
to  avoid  the  ruinous  sacrifice  in  marketing  long-term 
securities  in  an  unwilling  bond  market.  The  corpora- 
tion issuing  short-term  notes,  which  command  fair 
prices  at  nearly  all  times  usually  aims  to  secure  any 
required  permanent  funds  by  refunding  with  longer-term 


Bond  Limitation  135 


maturities  upon  the  appearance  of  favorable  financial 
markets. 

Much  acumen,  or  what  is  sometimes  just  as  effective, 
much  good  fortune,  must  attend  the  refunding  of  short- 
term  obligations.  This  is  also  true  of  long-term  bonds 
presently  maturing.  Bonds  issued  in  1898,  coming  due 
in  1923,  will  require  payment  or  refunding  in  1923  just 
as  truly  as  notes  issued  in  1919  and  due  four  years  hence. 
In  fact,  it  is  suggested  that  corporations  place  all  funded 
maturities  of  less  than  five  years  in  a  separate  category 
as  now  being  short-term  obligations,  no  matter  when 
issued. 

If  the  short-term  obligations  are  paid  off  at  maturity, 
well  and  good.  If  they  are  refunded  prior  to  or  at  this 
date  to  advantage  in  a  rising,  confident  bond  market,  it 
is  a  transaction  reflecting  credit  on  the  financial  manage- 
ment. But  not  all  short-term  obligations  are  either  paid 
at  maturity  or  positively  provided  with  refunding  ar- 
rangements. Every  little  while — parts  of  1907  and  1908 
and  of  1914,  for  example — credit  in  large  quantities  be- 
comes most  difficult  to  secure,  and  refunding  of  obliga- 
tions almost  impossible.  The  presence  of  a  large  amount 
of  obligations  maturing  within  a  year  or  two  may  prove 
a  millstone.  This  was  true  of  the  notes  of  the  highly 
prosperous  Westinghouse  Electric  and  Manufacturing 
Company  in  1907-1908. 

Financial  stringency  follows  a  plethora  of  loanable  funds 
as  surely  as  night  follows  the  day,  and  stringency  is  nor- 
mally soon  accompanied  by  decided  declines  in  corpora- 
tion incomes  conspiring  against  the  refunding  of  obliga- 
tions. 


136          How  to  Analyze  Industrial  Securities 

The  United  States  Rubber  Company  had  at  the  end  of 
1915  nearly  $32,000,000  funded  securities  of  long  term 
and  note  issues  maturing  by  the  first  day  of  December, 
1918,  besides  $19,939,709  loans  and  notes  payable,  which 
included  a  large  amount  of  borrowing  which  required 
reduction.  This  was  officially  recognized,  in  spite  of 
large  receivables  on  the  other  side  of  the  balance  sheet. 
The  company  is  prospering,  is  in  strong  hands,  and  is 
conserving  profits.  Many  stockholders  will  sleep  easier 
now  that  a  new  financing  plan  has  been  safely  under- 
written. 

A  comparison  of  balance  sheets  before  and  after  a 
bond  or  note  issue  is  placed  with  investors  usually  shows 
how  the  funds  have  been  used,  though  the  information 
is  usually  indicated  in  the  "remarks"  of  the  annual  re- 
ports. To  take  a  simple  example:  suppose  a  company 
has  a  note  issue  of  $10,000,000  maturing  in  1915.  Just 
before  maturity  the  company  sold  a  bond  issue  of  $20,- 
000,000.  The  annual  report  for  the  year  1915  would 
show  no  $10,000,000  note  issue;  instead  there  are  $20,- 
000,000  bonds  among  the  liabilities,  bills  payable  have 
decreased  by  $5,000,000  and  cash  increased  $6,000,000. 
It  would  be  evident  that  the  new  funds  had  been  used  to 
refund  the  note  issue,  to  reduce  the  payables  and  to 
increase  the  cash.  The  $1,000,000  cash  unaccounted  for 
would  probably  prove  to  come  from  earnings  saved  from 
the  year's  business. 


XXVIII 

Preferred  and  Common  Stocks 

AFTER  a  series  of  disasters  to  corporations  having 
outstanding  unwieldy  funded  indebtedness,  promo- 
tions were  made  by  the  flotation  of  cumulative 
preferred  stock  and  common  stock,  without  bonds.  In 
theory  the  preferred  stock  was  issued  to  the  value  of  the 
property.  In  certain  cases  cumulative  preferred  stock 
was  issued  for  more  than  the  value  of  the  assets — 
watered  preferred  stock.  To  issue  cumulative  preferred 
stock  to  the  value  of  the  property  usually  invited  reck- 
less action.  Few  corporations  can  expect,  until  fortified 
by  many  years  of  economy  and  business  expansion,  to  be 
able  consistently  to  earn  even  6  or  7  per  cent,  on  the 
value  of  the  property.  Depressions  in  this  country  are 
sharp. 

Several  of  the  largest  corporations  have  gone  into 
receivership  because  of  paying  unearned  dividends  on  the 
cumulative  preferred  stock.  To  be  sure,  cumulative  pre- 
ferred stock  dividends  are  not  arbitrary  charges.  They 
need  not  be  paid.  However,  corporations  are  managed 
for  the  benefit  of  common-stock  holders.  One  of  the 
human  failings  has  been,  especially  in  past  years,  to  value 
stocks  by  dividends  rather  than  by  earnings.  At  the 
time  of  organization  promoters  and  underwriters  usually 
receive  common  stock  for  their  efforts.  To  make  a  mar- 

(137) 


138          How  to  Analyze  Industrial  Securities 

ket  to  obtain  the  desideratum,  cash,  in  exchange  for  com- 
mon stock,  unwarranted  dividends  were  declared  on  pre- 
ferred stock  in  order  to  give  promise  of  dividends  on  the 
common. 

Cumulative  preferred  stocks  are  often,  like  most  com- 
promises, necessary  evils.  Corporations  not  unusually 
prosperous  issue  cumulative  preferred  stock  not  only  be- 
cause such  stock  may  be  sold  to  the  public  and  the  com- 
mon-stock holders  can  "trade  on  the  equity,"  but  because 
the  investing  public  demands  assurance  that  dividends 
on  the  preferred  stock,  shall  not  lapse  indefinitely  to  the 
ultimate  benefit  of  the  common-stock  holders.  History 
shows  that  in  far  too  many  cases  both  preferred-stock 
holders  and  common-stock  holders  have  suffered  de- 
plorably. It  would  seem  better  to  allow  dividends  on 
cumulative  preferred  stock  to  accumulate  until  the  cor- 
poration could  well  afford  to  take  care  of  them  than  to 
declare  the  dividend  at  the  expense  of  all  concerned. 

The  directors  of  the  Colorado  Fuel  &  Iron  Company 
declared  dividends  of  60%  in  1916  on  the  $2,000,000 
8%  cumulative  preferred  stock,  taking  care  of  dividends 
previously  omitted.  Years  before  the  company  could 
have  paid  in  full  the  comparatively  small  amount  in- 
volved in  squaring  up  the  dividend  requirement,  but 
little  criticism  is  levelled  at  the  management  for  its  con- 
servatism. 

Stock  certificates  should  be  as  carefully  examined  as 
deeds.  Every  word  may  be  essential.  The  preferred 
stock  should  be  preferred  as  to  earnings  and  in  case  of 
dissolution  as  to  distribution  of  assets.  If  the  dividends 


Preferred  and  Common  Stocks  139 

are  not  cumulative,  i.  e.,  payable  in  full  from  date  of 
issuance  to  present  date  at  the  rate  specified  before  any 
dividend  may  be  declared  on  the  common,  the  holder 
should  know  it.  If  any  of  the  preferred  dividends  due 
in  the  past  have  not  been  paid,  the  possibility  of  payment 
is,  perhaps,  the  most  important  consideration  in  regard 
to  the  purchase  of  the  stock. 

A  large  number  of  preferred  stocks  are  redeemable 
at  a  certain  price,  say  105  or  115,  and  some  preferred 
stocks  hang  around  the  redeemable  figure.  The  limita- 
tions of  possibilities  for  a  long,  profitable  investment  in 
such  stocks  are  evident.  On  the  other  hand,  substantial 
profits  have  come  to  purchasers  at  a  lower  figure  through 
redemption  at  the  callable  price. 

Some  preferred  stocks  participate  in  all  profits  with  the 
common  by  the  terms  of  the  certificate,  and  unless  the  re- 
turn on  the  preferred  is  specifically  limited  the  preferred 
stock  shares  equally  with  the  common  after  the  pre- 
ferred dividend  is  paid  in  full. 

Many  of  the  corporations  having  preferred  stock  are 
retiring  it  either  as  a  matter  of  expediency  or  because 
of  a  provision  entered  into.  The  Woolworth,  Kresge 
and  McCrory  Corporations  have  pledged  themselves  to 
issue  no  bonds  nor  to  increase  the  preferred  stock  with- 
out consent  of  2/3  of  both  common  and  preferred  stock. 
Moreover,  a  certain  amount  is  set  aside  by  each  of  these 
corporations  for  the  redemption  of  preferred  stock  up  to 
a  certain  stipulated  market  price.  The  Woolworth  Com- 
pany has  retired  $2,500,000  of  preferred  and  has  a  large 
amount  in  the  treasury  to  be  retired. 


140          How  to  Analyze  Industrial  Securities 

The  Bethlehem  Steel  Corporation  has  authorized  and 
outstanding  $30,000,000  of  8%  non-voting  cumulative 
convertible  preferred  stock.  It  is  preferred  as  to  divi- 
dends over  $14,908,000  7%  preferred  and  shares  equally 
with  the  7%  as  to  assets.  The  8%  issue  is  convertible 
at  any  time  at  the  holder's  option  into  the  "B"  class 
common  stock  at  115.  That  is,  1150  par  value  of  8% 
preferred  is  exchangeable  for  1000  of  "B"  common.  The 
convertible  preferred  however  is  redeemable  on  90  days' 
notice  at  115  and  accrued  dividends  from  Jan.  1,  1917. 

A  large  automobile  company  has  recently  issued  8<fo 
cumulative  preferred  stock,  participating  with  the  com- 
mon after  4%  dividends  have  been  paid  on  the  com- 
mon. The  preferred  is  redeemable  at  $200  a  share. 

Following  are  the  principal  provisions  of  the  preferred 
stock  of  an  industrial  corporation  recently  recapitalized: 

I. — The  preferred  stock  shall  not  be  increased  without  the  con- 
sent of  the  holders  of  at  least  two-thirds  of  the  preferred  and 
two-thirds  of  the  common  stock  then  outstanding. 

II. — No  mortgage  lien  or  encumbrance  of  any  kind  on  any  of 
the  real  or  personal  property,  assets,  effects  or  goodwill  shall 
be  created,  be  valid  or  effective  unless  the  same  shall  have  been 
previously  authorized  by  the  consent  of  at  least  two-thirds  of 
each  class  of  the  outstanding  preferred  and  common  stocks.  This 
shall  not  in  any  way  prevent  the  giving  of  purchase  money  mort- 
gages or  purchase  money  liens  on  property  real  or  personal  here- 
after acquired  by  the  new  corporation. 

III. — Dividends  are  cumulative,  payable  7%  per  annum  quar- 
terly the  first  days  of  January,  April,  July  and  October. 


Preferred  and  Common  Stocks  141 

IV. — In  case  of  liquidation,  dissolution  or  the  winding  up  of 
affairs  and  distribution  of  assets,  holders  of  the  preferred  stock 
shall  be  entitled  to  be  paid  in  full  at  120%  and  accrued  dividends 
on  the  par  value  of  the  shares. 

V. — At  least  20%  of  the  surplus  net  profits  of  each  year,  after 
the  payment  of  preferred  dividends,  shall  be  used  to  acquire  and 
cancel  at  not  more  than  120  and  accrued  dividends  the  outstand- 
ing preferred  stock. 

VI. — The  preferred  stock  is  callable  in  whole  or  in  part  after 
January  1,  1917,  on  any  quarterly  dividend  date,  at  the  option 
of  the  corporation,  at  120  and  accrued  dividends  upon  90  days' 
notice  to  registered  holders. 

VII.— Annual  audit  by  certified  public  accountants  nominated 
by  the  bankers  as  long  as  there  is  any  preferred  stock  out- 
standing, and  directors  are  to  be  named  by  the  underwriters  of 
the  preferred  stock  as  long  as  any  preferred  stock  remains  out- 
standing. 

VIII.— No  dividends  payable  on  the  common  stock  of  the  com- 
pany until  a  surplus  of  $70,000  from  the  net  earnings  over  and 
above  20%  sinking  fund  for  the  purchase  and  redemption  of 
the  preferred  shares  shall  have  been  created  and  maintained. 

IX.— The  preferred  stock  shall  not  be  entitled  to  vote  except 
on  a  proposition  to  increase  the  amount  of  preferred  stock  or 
to  mortgage  or  encumber  the  company's  property,  unless  the  new 
company  shall  pass  two  successive  quarterly  dividends.  Then 
the  preferred  stock  shall  have  an  equal  voting  right  share  for 
share  with  the  common  stock;  and  if  four  successive  quarterly 
dividends  are  passed  then  the  preferred  stock  shall  have  the  en- 
tire voting  right  and  the  common  stock  shall  be  deprived  of  its 
voting  right  until  all  of  the  dividends  which  may  then  have  ac- 
cumulated shall  have  been  paid  in  full. 


XXIX 

Changing  Capitalization  Form 

IF  a  large  bond  issue  causes  a  mandatory  drain  upon 
a  company's  funds — a  drain  which  may  prove  burden- 
some— it  follows  that  the  replacement  of  bonds  by 
common  stock  at  a  fair  exchange  ratio  is  a  measure  mak- 
ing for  strength.     Necessary  payments  are  turned  into 
optional  distributions. 

Take,  for  example,  the  United  Fruit  Company.  On 
September  30,  1915,  the  company  had  $36,619,000 
stock  and  $33,359,000  bonds,  a  ratio  of  bonds  to  stock 
of  91%.  Now,  United  Fruit  stock  has  continuously  sold 
above  par.  The  company  issued  in  1916  $12,198,100 
stock  at  $120  per  share.  With  this  accomplished  and  the 
proceeds  largely  used  for  retiring  short-term  bonds,  the 
ratio  of  funded  indebtedness  to  stock  fell  to  43%.  This 
change  in  form  of  capitalization  will  decrease  the  earn- 
ings of  the  entire  stock,  because  the  funded  debt  retired 
required  6%,  while  the  stock  returns  8%,  but  much 
more  than  par  was  received  for  the  new  stock,  and  earn- 
ings are  so  large  that  increased  strength  of  financial 
structure  will  not  deprive  the  stockholders  of  the  regular 
return.  By  subscribing  to  the  new  capital  stock  at  120 
while  the  stock  was  selling  much  higher  in  the  open 
market,  the  privileged  stockholders  partook  in  a  pro- 
cedure immediately  profitable  to  them. 

(143) 


144         How  to  Analyze  Industrial  Securities 

The  $8,000,000  long-term  issues  of  the  United  Fruit 
Company  are  steadily  being  retired  by  sinking-fund  pro- 
vision and  will  be  extinguished  thereby  before  maturity 
in  1923. 

Now,  it  would  not  avail  the  corporation  to  have  con- 
verted its  short-term  bonds  into  stock  if  the  stock  al- 
ready outstanding  had  not  sold  well  above  par.  A  sud- 
den increase  in  capital  stock  would  have  painfully  de- 
pressed the  market  and  be  marketed  only  at  ruinous  con- 
cessions from  even  the  price  ruling  before  the  increase. 
The  sale  of  the  stock,  say  at  60,  would  result  in  in- 
definitely postponing  any  adequate  return  on  the  entire 
amount  of  stock. 

With  stock  selling  well  above  par  and  earnings  good, 
the  moderate  increase  in  stock  coincident  with  the  re- 
tirement of  funded  debt  materially  stabilizes  the  corpora- 
tion finances  without  any  material  loss  to  stockholders. 

A  favored  method  designed  to  increase  the  proportion 
of  stock  to  bonds  as  well  as  to  attract  needed  capital  is 
the  issuance  of  convertible  bonds.  Suppose  a  company's 
common  stock  sells  at  75.  A  large  sudden  increase  in 
the  amount  would  be  disastrous.  Yet  the  company  might 
be  able  to  sell  an  issue  of  bonds  convertible  into  the  com- 
mon stock  at  par.  A  holder  of  a  $1,000  bond  could 
exchange  it  for  ten  shares  or  $1,000  par  value. 

Convertible  bonds  have  been  said  to  be  the  securities 
a  man  buys  after  he  promises  his  wife  not  to  speculate 
in  stocks.  The  convertible  bond,  whether  secured  by 
mortgage,  or,  as  a  debenture,  only  by  the  general  credit 
of  the  company,  holds  its  price  as  a  bond,  and  may 


Changing  Capitalization  Form  145 

enjoy  a  splendid  increase  in  value  if  the  stock  advances 
above  the  conversion  figure. 

Suppose  a  convertible  5%  debenture  bond  is  pur- 
chased at  90,  or  $900  for  a  $1,000  bond,  is  convertible 
into  stock  at  par,  and  the  stock  advances  from  75  to  130. 
The  price  of  the  bond  will  keep  company  with  that  of 
the  stock,  because  as  soon  as  the  stock  is  over  90,  a  bond- 
holder can  profit  by  exchanging  the  bonds  for  stock  at 
any  time.  Exchanging  an  original  value  of  $900  for  the 
stock  at  130  would  profit  the  bondholder  $400.  The  com- 
pany's strength  is  increased  by  conversion  because  interest 
charges  are  reduced. 

The  purchaser  of  convertible  bonds  should  carefully 
read  the  text  of  his  security,  however.  He  may  find  that 
the  attractive  convertibility  feature  is  qualified  by  an  op- 
tion of  the  company  to  retire  it  at  a  limited  figure.  For 
example,  the  American  Agricultural  Chemical  Company 
has  an  issue  of  5%  debenture  bonds  convertible  into 
common  stock  at  any  time  until  the  bonds  mature  in 
1928.  The  common  stock  is  active  and  may  sell  well 
above  par  but  the  bonds  are  redeemable  as  a  whole 
at  101. 


XXX 

Current  Liabilities 

CURRENT  Liabilities  include  those  unfunded  cor- 
porate obligations  which  will  soon  be  payable.  Ar- 
bitrarily, therefore,  a  bond  or  note  issue  maturing 
in  three  months  is  not  a  Current  Liability  because  funded, 
while  a  bank  loan  payable  in  six  months  is  considered 
very  much  a  Current  Liability. 

In  the  list  of  Current  Liabilities  given  in  the  balance 
sheet  page  77  are:  Taxes  Accrued,  Payroll  Accrued, 
Accounts  Payable,  Notes  and  Drafts  Payable,  Expenses 
Accrued,  Interest  Accrued  on  Notes  and  Drafts  Payable, 
Dividends  Payable,  Interest  Accrued  on  First  Mortgage 
Bonds  and  Interest  Accrued  on  Five- Year  Notes.  Six  of 
the  nine  items  are  accruals. 

The  balance  sheet  of  the  "Montville  Manufacturing 
Company,"  from  which  the  list  of  Current  Liabilities  was 
taken,  is  arbitrarily  dated  December  31,  1919.  A  corpora- 
tion is  not  able  to  keep  its  expenses  paid  up  to  date. 
Take  interest  on  bonds,  for  example.  As  of  December 
31st,  interest  on  First  Mortgage  5%  Bonds,  paid  October 
1st,  is  not  due  again  till  April  1st.  Yet  the  liability 
mounts  every  day  from  October  1st,  and  on  December 
31st  amounts  to  l%%,  which  is  a  Current  Liability  as 
much  as  a  note  due  in  three  months. 

Certain    taxes,    not   payable   till    some   months    later, 

(147) 


148         How  to  Analyze  Industrial  Securities 

apply  to  the  period  dating  from  September  1st,  so  l/z  of 
these  taxes,  not  due  and  unpaid,  but  mounting  up,  must 
be  shown  as  a  Current  Liability  on  December  31. 

Notes  and  drafts  payable,  which  were  made  out  some 
little  time  ago,  but  with  interest  payable  only  upon  ma- 
turity, have  created  a  Current  Liability  to  the  extent 
that  the  interest  figures  up  to  December  31st. 

Again,  December  31,  1918,  was  Tuesday.  Wages  are 
usually  paid  Saturday,  so  wages  would  normally  re- 
main unpaid  December  31st.  Unpaid  wages,  ac- 
cording to  law,  constitute  a  debt  which  is,  next 
to  taxes,  the  most  inflexible  liability  extant.  Salaries 
of  officers,  salesmen,  etc.,  usually  payable  monthly, 
will  have  been  paid  on  December  31st  and  will  not 
appear  on  the  balance  sheet.  Petty  items,  such 
as  unrendered  and  unpaid  telephone,  electric  light  and 
garage  bills,  make  up  the  item  Expenses  Accrued. 
Corporation  accountants  use  the  data  they  have  and 
common  sense,  later  adjusting  the  books  to  actualities, 
but  at  best  the  balance  sheet  is  a  painting,  not  an  exact 
photograph  of  a  corporation's  financial  condition. 

Some  corporations  show  all  accrued  items  under  a 
special  head  of  Accrued  Liabilities.  Unless  this  head  is 
included  in  Current  Liabilities,  the  separation  of  part  of 
the  actual  Current  Liabilities  may  lead  the  unwary 
astray. 

Accounts  and  Bills  Payable  must  by  all  means  be 
separated.  Accounts  Payable  are  amounts  due  for  sup- 
plies, materials,  goods,  etc.,  and  may  vary  considerably 
in  amount,  being  small  or  large  according  to  the  sea- 


Current  Liabilities  149 

sonal  requirements  of  the  business  at  the  date  when  the 
balance  sheet  is  taken  off  the  books.  Bills,  Notes  and 
Drafts  Payable  may  be  quite  different  in  origin  and  ef- 
fect. Bills  and  Notes  Payable  are  terms  used  inter- 
changeably and  Bills  Payable,  when  separately  stated, 
often  includes  Drafts  Payable. 

Notes  Payable  and  Drafts  Payable  accepted  for  pay- 
ment at  maturity  are  issued  to  cover  current  supply 
or  merchandise  accounts  past  due,  or  to  raise  funds  for 
any  number  of  purposes,  including  that  of  taking  advan- 
tage of  any  cash  discounts  offered.  Most  industrial  en- 
terprises are  of  a  seasonal  nature.  Take  the  canning  in- 
dustry, for  example,  with  the  necessary  expenditures  con- 
centrating in  the  summer.  Canners  naturally  arrange 
for  credits,  giving  notes  payable  in  return,  which  are 
paid  upon  sale  of  the  cannery  output. 

Wholesalers  and  manufacturers  quite  generally  finance 
themselves  with  notes  payable,  which,  as  30,  60  or  90-day 
commercial  paper,  form  a  commodity  in  the  financial 
world.  A  difficulty  has  been  that  corporations  have 
been  known  to  sell  more  commercial  paper  (Notes  Pay- 
able) than  the  buyers  were  aware  of.  Maturing  commer- 
cial paper  has  been  paid  from  the  proceeds  of  still  more 
paper  sold,  with  the  total  amount  gradually  increasing. 
The  facts  would  appear  only  in  a  time  of  stress,  when 
commercial  paper  would  become  unsalable.  Of  course, 
such  secret  inflation  of  credit  would  not  appear  on  the 
balance  sheet. 

The  prevention  of  such  an  unfortunate  condition  is  to 
be  found  principally  in  exhaustive  audits  by  reliable 


150         How  to  Analyze  Industrial  Securities 

public  accountants,  and,  second,  by  the  requirement  of 
banks  and  other  purchasers  that  all  commercial  paper 
offered  be  registered  with  a  trust  company,  so  that  the 
total  amount  outstanding  be  as  easily  ascertainable  as  the 
amount  of  bonds  or  stocks  outstanding.  The  prospective 
investor  in  the  stocks  or  bonds  of  a  corporation  financing 
itself  in  any  measure  with  commercial  paper  should  sat- 
isfy himself  that  the  notes  are  duly  registered.  The 
Endicott,  Johnson  Shoe  Company  is  an  example  of  cor- 
porations which  have  taken  the  advanced  step  of  regis- 
tering their  paper.  Such  action  redounds  to  the  credit 
of  the  corporation  as  well  as  to  the  protection  of  banks 
and  investors. 

Contingent  Liabilities  is  an  account  which  should  ap- 
pear at  the  bottom  of  many  balance  sheets  where  it  is 
not  now  to  be  found.  Since,  as  the  account  implies,  the 
liability  may  or  may  not  be  absolute,  the  account  should 
not  be  placed  in  the  balance  sheet,  but  as  a  footnote 
under  the  balance  sheet.  Corporations  often  sign  "ac- 
commodation paper"  just  as  do  individuals.  Usually  this 
paper  is  made  by  a  subsidiary  or  affiliated  corporation, 
but  the  contingent  liability  exists  just  the  same.  Often  a 
corporation  guarantees  the  principal  or  interest  or  both  of 
a  subsidiary's  bonds  or  guarantees  the  payment  of  divi- 
dends on  the  stocks  of  a  subsidiary  or  affiliated  com- 
pany. At  the  time  of  execution,  of  course,  the  liability  is 
mostly  nominal,  but  the  future  is  always  uncertain  and 
contingent  liability  may  become  a  most  immediate  and 
proximate  one.  Therefore,  any  contingent  liability 
should  be  known  to  the  prospective  partner  in  a  corporate 


Current  Liabilities  151 

enterprise  just  as  logically  as  should  an  individual's  con- 
tingent liabilities  be  known  to  anyone  who  is  about  to 
enter  into  partnership  with  him. 

In  1913,  when  the  assets  of  the  International  Harvester 
Company  were  divided,  part  going  to  the  International 
Harvester  Corporation,  the  original  company  was  not  re- 
lieved of  liability  on  $15,000,000  loans  transferred  to  the 
"Corporation,"  which  was  the  export  and  foreign  end. 
The  $15,000,000  remained  as  a  Contingent  Liability  of  the 
domestic  company.  The  possibility  of  importance  of 
such  a  liability  is  evident. 


XXXII 

Working  Capital 

WORKING  Capital  or  Net  Current  Assets  is  the 
net,  free,  quick  assets  of  a  corporation.  It  will 
not  be  specified  on  the  balance  sheet,  but  is  easily 
found  by  subtracting  the  current  liabilities  from  the  cur- 
rent assets. 

The  amount  of  Working  Capital  is  of  extreme  im- 
portance to  most  industrial  corporations.  They  need 
large  amounts  of  free  capital,  quite  different  from  the 
needs  of  public-utility  companies,  which  do  a  steady  cash 
business.  The  Working  Capital  necessary  depends 
largely  upon  the  character  of  the  business. 

A  chain-store  corporation,  with  steady  dependable 
business,  operating  on  a  cash  basis  is  financially  consti- 
tuted in  quite  a  different  manner  than  say  a  steel  corpora- 
tion. On  December  31,  1918,  the  highly  solvent  and  pros- 
perous F.  W.  Woolworth  Company,  actually  had  no  net 
quick  assets  at  all  if  we  carefully  exclude  the  very  large 
inventory  and  goods  in  transit  account  of  $18,431,813 
as  Working  and  Trading  assets  rather  than  Current 
Assets  (see  page  109). 

The  United  States  Steel  Corporation,  whose  busi- 
ness is  subject  to  wide  fluctuations,  with  business 
about  fifteen  times  that  of  the  Woolworth  Company, 
at  the  end  of  1918,  carried  a  net  Working  Capital  (ex- 

(153) 


154 


How  to  Analyze  Industrial  Securities 


eluding  $274,753,600  inventories)  of  $210,600,999.  In 
1909  the  Steel  Corporation's  Working  Capital  (exclud- 
ing $163,811,280  inventories)  amounted  to  $66,062,161. 

Few  corporations  as  yet  take  the  advanced  stand  of 
setting  up  separate  items  for  "Working  and  Trading 
Assets."  These  items  are  usually  grouped  as  "Inven- 
tories" and  included  among  "Quick  Assets"  and  there- 
fore as  part  of  "Working  Capital"  or  "Net  Quick  As- 
sets." 

As  showing  on  the  whole  usual  practice,  the  Working 
Capital  of  the  General  Electric  Company  as  of  Decem- 
ber 31,  has  been  as  follows: 


CURRENT  ASSETS— 
Cash  .................... 

Notes  and  accts.  rec  ..... 

Mdse.    Inventories    ..... 

Work  in  progress,  instal. 
Due  from  subsid.  cos.... 

Def.  charges  to  inc  ...... 

U.  S.  Treas.  Certs 


1919 

$30,994,397 

45,885,528 

83,978,463 

4,974,174 

4,675,712 

1,298,141 


1918 

$24,010,024 

41,548,688 

88,305,681 

6,526,304 

7,997,688 

4,410,346 

7,500,000 


1917 

$21,190,675 

38,406,993 

81,851,311 

6,244,691 

5,578,518 

1,277,063 


Total   current   assets..  $171,806,415  $180,298,731  $154,549,251 

CURRENT  LIABILITIES— 

Accts.  payable  ..........     $12,996,272  $9,716,157  $8,009,910 

Accrued  taxes   .........       18,956,409  15,099,185  7,855,748 

Advance      payments      on 

contracts    .............       13,654,418  22,336,551  8,233,881 

Accrued  interest  ........           234,269  284,268  254,211 

Div'ds  payable  (Cash)  ..        2,410,098  2,316,472  2,030,156 

Total  current  liabil....     $48,251,466  $49,752,633  $26,383,906 

Net  working  capital  .      .  $123,554,949  $130,546,098  $128,165,345 


Working  Capital  155 


Certain  deferred  charges,  expense  items,  interest,  insur- 
ance, taxes,  etc.,  paid  in  advance,  have  been  considered 
part  of  the  "revolving  fund"  of  corporate  activity,  and  as 
per  a  sound  but  little  used  accounting  practice,  con- 
sidered a  Current  Asset. 

It  is  interesting  to  note  that  the  company's  reports  do 
not  consider  the  Advance  Payments  on  Contracts  as  a 
Current  Liability.  On  the  other  hand  a  Government 
Loan,  apparently  a  current  item,  is  really  a  long  term 
obligation. 

Eliminating  the  inventories  (except  for  work  in  in- 
stalation,  very  soon  to  be  transferred  into  cash  or  re- 
ceivables, and  therefore  arbitrarily  included  among  cur- 
rent assets)  the  Working  Capital  for  the  past  four  years 
was: 

1919  1918  1917  1916 

$39,576,486       $42,240,417       $46,314,034       $32,018,482 

In  comparison  the  M.  Rumley  Company  exhibited, 
just  before  its  crash,  a  Working  Capital  of  $12,275,826. 
Eliminating  inventories  of  $11,324,224  the  Working  Cap- 
ital stood  at  $951,602. 

A  corporation's  Working  Capital  should  normally  in- 
crease year  by  year.  It  should  not  be  seriously  depleted 
except  for  good  cause.  Especially  it  should  not  be  seri- 
ously depleted  because  of  declaration  of  dividends.  The 
history  of  large  corporations  during  the  first  few  years 
of  this  century  was  largely  a  repetition  of  the  same  finan- 
cial blunder;  weakening  Working  Capital  through  un- 
warranted dividends. 

*"The  inadequacy  of  working  capital   seriously  ham- 

*Sakolski. 


156         How  to  Analyze  Industrial  Securities 

pered  progress.  In  acquiring  control  of  their  respective 
industries,  a  number  of  the  new  consolidations  took  over 
obsolete  and  dilapidated  plants.  Modernization  and  ex- 
tension of  these  plants  became  necessary.  Funds  for 
this  purpose  had  to  be  obtained  from  accumulated  profits. 
Several  of  the  industrial  concerns  endeavored  to  increase 
the  profits  by  increasing  prices,  but  this  policy  merely  re- 
sulted in  renewed  competition  and  widespread  popular 
disfavor.  The  policy  of  paying  out  in  dividends  an  ex- 
cessive amount  of  current  earnings  further  impaired  the 
Working  Capital,  preventing  an  expansion  of  operations 
and  weakening  the  concerns  against  declines  in  profits 
arising  from  business  depressions." 

If  current  liabilities  are  larger  than  current  assets,  a 
Floating  Debt  exists  instead  of  Working  Capital.  A  cor- 
poration is  usually  in  a  bad  way  when  confronted  with  a 
Floating  Debt.  It  may  have  good  business  and  a  large 
amount  of  permanent  fixed  assets,  but  bankers,  invest- 
ment dealers  and  investors,  as  well  as  commercial  credi- 
tors, take  an  attitude  of  skepticism.  All  seem  to  con- 
spire to  prevent  the  extension  of  further  credit  to  enable 
the  corporation  to  work  its  way  out.  Such  conditions 
usually  become  acute  during  periods  of  general  liquida- 
tion. In  1907  several  large  and  exceedingly  busy  indus- 
trial corporations  were  forced  into  bankruptcy  because 
of  having  a  Floating  Debt  instead  of  a  good  amount  of 
Working  Capital. 


XXXII 
Reserves 

THE  necessity  for  adequate  reserves  has  been  taken 
up  on  pages  82-98  and  109-119. 
Other  reserves,  aside  from  those  set  up  to  provide 
against  depreciation  of  buildings,  equipment,  securities, 
materials,   and   accounts    and  notes   receivable,  may  be 
provided  for  special  repairs,  e.  g.,  relining  blast  furnaces, 
and  to  compensate  for  the  exhaustion  of  an  asset  such 
as  a  coal  or  ore  property  which  is  being  depleted. 

Reserves  are  entirely  different  from  the  asset  Funds, 
which  must  always  be  represented  in  cash  or  marketable 
securities.  Reserves  are  amounts  placed  on  the  liability 
side  of  the  balance  sheet  as  special  purpose  accounts 
taken  from  Profit  and  Loss.  The  Reserve  for  Deprecia- 
tion of  Raw  Materials,  for  example,  is  established  by 
debiting  (decreasing)  Profit  and  Loss  and  crediting  the 
Reserve  for  Depreciation  of  Raw  Materials. 

No  cash  or  other  special  asset  is  represented  by  the 
amount  placed  in  the  reserve  accounts.  The  amount  of 
the  Reserves  are  represented  in  the  total  of  the  assets  on 
the  opposite  side.  The  amount  credited  to  the  reserves 
decreases  or  offsets  the  amount  of  free  assets  and  by 
the  amount  of  the  reserves  cuts  down  the  Profit  and  Loss 
available  for  dividends. 

(157) 


158         How  to  Analyze  Industrial  Securities 

Yet  a  reserve  may  be  created  for  the  special  purpose  of 
providing  for  regular  dividends.  Instead  of  a  liability 
created  to  provide  against  loss,  part  of  the  Profit  and 
Loss  may  be  credited  or  specially  earmarked  as  a  Re- 
serve for  Dividends.  Corporations  having  irregular 
earnings,  such  as  the  American  Car  and  Foundry  Com- 
pany, have  taken  this  method  of  setting  aside  directly  part 
of  Profit  and  Loss  Surplus.  Little  is  gained  by  such  pro- 
cedure, because  Profit  and  Loss  Surplus  is  itself  a  Re- 
serve for  Dividends. 

Since  no  cash  or  special  asset  is  represented  by  a  Re- 
serve a  corporation  might  have  a  Reserve  for  Dividends 
amounting  to  a  million  dollars  and  yet  not  be  able  to  pay 
a  dividend  requiring  half  that  much  actual  cash.  Cash 
might  be  low  and  still  the  Reserve  be  bona  fide,  repre- 
sented in  the  assets  as  a  whole. 


XXXIII 
Surplus 

PROFIT  and  Loss  Surplus  is  not  a  tangible  account 
any  more  than  the  reserves.     Though  originating 
as  undivided  profits,  the  Profit  and  Loss  Surplus 
will  be  found  to  be  simply  the  remainder  after  subtract- 
ing the  liabilities  and  the  capital  stock  from  the  assets. 
It  evidences  the  amount  of  assets  above  liabilities  belong- 
ing to  the  stockholders  aside  from  and  added  to  the  par 
value  of  the  stock. 

The  surplus  is  real  only  if  the  assets  are  real,  and  if 
the  liabilities  are  correctly  stated.  If  a  corporation  has 
$1,000,000  worthless  "Goodwill"  among  its  assets  and 
$500,000  nominal  Profit  and  Loss  Surplus,  no  actual  sur- 
plus exists,  but  instead  a  true  deficit  of  $500,000. 

Even  when  the  book  surplus  is  entirely  bona  fide,  it  is 
seldom  available  in  cash  assets.  The  Profit  and  Loss 
Surplus  is  simply  an  account  of  profits  not  used  for  divi- 
dends, but  these  profits  usually  have  been  used  in  the 
corporation's  business.  So  the  surplus  may  be  repre- 
sented in  materials,  in  machinery,  in  plant  or  in  part  of 
any  number  of  assets.  It  is  quite  possible  for  a  cor- 
poration to  have  a  splendid  surplus  in  fixed  assets,  and  yet 
be  hard  pressed  for  ready  cash.  Hence,  while  possible 
surplus  is  decreased  by  the  cash  expended  in  dividends, 
yet  "paying  dividends  out  of  surplus"  is  scarcely  a 

(159) 


160          How  to  Analyze  Industrial  Securities 

statement  of  fact.  Cash  dividends  are  of  course  payable 
only  in  cash.  Financial  strength  usually  depends  more 
upon  the  amount  of  free  working  capital  assets  than 
upon  the  amount  of  nominal  surplus. 

Capital  Surplus  is  an  account  similar  to  Profit  and  Loss 
Surplus,  but  created  in  quite  a  different  manner.  Suppose 
10,000  shares  of  stock  are  sold  at  150  or  $1,000,000  par 
value  sold  for  $1,500,000.  The  difference  of  $500,000  is 
not  to  be  credited  to  Profit  and  Loss  Surplus  because 
it  is  not  considered  an  earned  profit  account,  but  a  sep- 
arate Capital  Surplus  account. 

Many  balance  sheets  do  not  show  Profit  and  Loss  sep- 
arately from  Capital  Surplus,  but  show  the  mixed  account 
as  simply  "Surplus."  Part  of  the  Surplus  item  of  one  of 
the  largest  industrials  originated  from  an  exchange  of 
securities.  Second  preferred  6%  stock  was  exchanged 
for  first  preferred  8%  stock  at  four  shares  of  the  6<fo 
for  three  of  the  8%  stock.  The  actual  dividend  require- 
ment remained  the  same.  However,  the  capital  stock 
amount  was  reduced  and  the  company  exhibited  the  dif- 
ference as  an  addition  to  Surplus.  No  deception  was 
intended  and  the  transactions  are  explained  in  the  an- 
nual reports,  but  an  examination  of  the  balance  sheet 
leads  many  people  to  believe  the  large  "Surplus"  to  repre- 
sent only  profits  conserved  from  the  business. 


XXXIV 

Book  Value 

A  CONVENTIONAL  measure  of  value  of  securities 
is  "Book  Value."  This  is  the  theoretical  value 
of  the  common  stock  as  worked  out  from  the  bal- 
ance sheet  without  consideration  of  earning  power.  The 
liabilities,  including  the  bonds,  and  the  preferred  stock 
at  par  are  subtracted  from  the  assets  and  the  remainder 
divided  by  the  number  of  common  shares  outstanding. 
As  an  example  take  the  Ford  Motor  Company's 
stock.  Not  having  any  bonds  or  preferred  stock  and 
negligible  intangible  assets  (Patents,  etc.,  at  $67,981), 
the  calculation  is  simple.  The  tangible  assets  for  1918 
totaled  $203,681,479  and  the  liabilities,  including  the 
Accounts  Payable,  Accrued  Expenses,  and  Deprecia- 
tion Reserve  amounted  to  $26,506,732.  Subtracting  the 
liabilities  from  the  total  assets  leaves  $177,174,747, 
or  a  "Book  Value"  of  $8,858.73.  This  is  "proven"  by 
adding  the  capitalization,  $2,000,000  to  the  $175,- 
242,728  surplus,  minus  the  $67,981  patent  account  which 
is  deducted,  perhaps  arbitrarily  in  this  particular  in- 
stance, leaving  $177,174,747,  which,  as  before  divided 
by  20,000  shares,  shows  $8,858.73  book  value  per  share. 


(161) 


162          How  to  Analyze  Industrial  Securities 


FORD  MOTOR  CO. 

ASSETS  :  1918 

Real  Estate $37,117,363 

Machine    Equipment 29,335,982 

Material  in  Process 44,522,562 

Cash,  Debts  Receivable 91,471,851 

Patents,  etc  67,981 

Inventories 1,231 ,906 

Investments  1,815 


Total $203,749,460 

LIABILITIES  : 

Capital  Stock $2,000,000 

Accounts   Payable 10,653,327 

Surplus  175,242,728 

Accrued  Expenses 5,950,564 

Depreciation  Reserve 9,902,841 


Total $203,749,460 

Calculation  of  Book  Value  is,  of  course,  exact  only 
as  the  accounts  used  are  reliable  and  accurate.  It  is  in- 
teresting to  note  how  varying  valuations  of  the  property 
account  affect  analysis.  For  example,  the  ore  holdings  of 
the  United  States  Steel  Corporation  have  been  estimated 
at  from  two  hundred  to  twelve  hundred  million  dollars. 


Book  Value  163 


The  difference  amounts  to  about  $200  a  share  for  the 
common  stock! 

It  is  customary  and  generally  only  fair  to  disregard 
intangible  accounts  such  as  Goodwill  in  figuring  Book 
Values.  The  inclusion  of  a  large  amount  of  Goodwill 
destroys  the  helpfulness  of  the  calculation,  as  it  is  usual 
arbitrarily  to  make  the  Goodwill  item  large  enough  to 
balance  the  liabilities  plus  stocks. 

At  best,  Book  Values  are  usually  of  service  only  as 
they  are  checked  by  conclusions  from  other  sources.  As 
stated  before,  at  a  time  when  the  old  Allis-Chalmers  pre- 
ferred stock  was  worth  practically  nothing  in  the  market, 
actual  assets  to  the  extent  of  over  a  hundred  dollars  a 
share  stood  back  of  each  share.  The  assets  were  not 
negotiable  and  earnings  were  less  than  nothing. 

On  the  other  hand,  F.  W.  Woolworth  common  stock 
when  issued  had  no  assets  at  all  behind  it.  It  was  all 
water — it  had  no  Book  Value.  Yet  it  sold  around  80 
"When  Issued." 

On  December  31,  1915,  the  Book  Value  of  the  stock 
was  only  $17  per  share.  Yet  it  sold  no  lower  than  113^2 
during  the  month.  Earnings  averaging  nearly  11%  for 
the  past  four  years  made  the  value. 


PART  VI 
INCOME  FACTORS 


XXXV 
The  Income  Account 

IN  all  commercial  enterprises  earnings  are  the  final 
criterion  of  progress.     It  is  better  to  hold  securities 
of   a   thriving  corner   grocery   or   a   5    and    10-cent 
store  than  of  a  splendidly  equipped  cotton  mill  whose  an- 
nual reports  reveal  chronic  deficits.     Great  assets  are  of 
little  avail  unless  they  are  capable  of  profitable  business. 

While  the  Balance  Sheet  is  supposed  to  show  the  rela- 
tive solvency  of  a  corporation  at  the  end  of  the  fiscal 
year,  the  Income  report  shows  the  changes  which  have 
occurred  during  the  year  affecting  the  balance  sheet. 
The  Income  account  shows  the  conduct  of  the  business 
and  the  losses  and  gains.  Yet  the  skepticism  of  a  "Down 
East"  horse  trader  must  accompany  the  examination  of 
even  the  most  promising  income  account.  No  more  than 
the  balance  sheet  is  it  devoid  of  possibilities  of  misrep- 
resentation and  abuse. 

It  is  unfortunate  that  the  lack  of  standardization  pre- 
vents exact  comparison  of  income  accounts  of  different 
companies.  In  time,  standards  will  be  worked  out,  per- 
haps by  the  Federal  Trade  Commission,  and  enforced 
by  special  authority.*  Until  some  such  action  is  taken 
accounts  will  only  gradually  approach  any  semblance 
of  standardization. 


*See  page  70.  (165) 


XXXVI 

Consistent  Form  Necessary 

THE  best  accountants,  otherwise  of  calm  and  ju- 
dicial mien,  differ  violently  as  to  the  form  of  the 
simplest  Income  Account  and  as  to  the  very  names 
of  the  items.     In  fact,  one  eminent  accountant  found 
the  name  of  what  will  here  arbitrarily  be  called  the  "In- 
come Account"  masquerading  under  some  sixteen  aliases. 

Yet  the  Income  Account  is  usually  much  easier  of  com- 
prehension than  the  balance  sheet,  and  assuming  that  the 
methods  of  accounting  in  individual  corporations  remain 
unchanged,  the  Income  Accounts  may  be  analyzed  with 
some  satisfaction. 

Accounting  methods  change  with  changes  in  control, 
in  deference  to  suggestions  of  public  accountants,  and 
sometimes  with  exigencies  of  a  situation  apparently  de- 
manding bolstering.  A  careful  perusal  of  the  "General 
Remarks"  and  of  footnotes  to  the  Income  Account  in  an- 
nual reports  will  often  clear  an  otherwise  inexplicable 
discrepancy  in  the  figures.  For  example,  a  phenomenal 
increase  in  sales  may  result  simply  from  acquiring  the 
business  of  a  competing  company.  If  the  amount  paid 
is  not  large,  even  an  examination  of  both  balance  sheet 
and  Income  Account  proper  would  not  disclose  the 
changed  basis. 

(167) 


168          How  to  Analyze  Industrial  Securities 

Items  like  insurance,  rent  and  taxes  may  one  year  be 
placed  as  general  expenses  and  the  next  as  among  the 
fixed  charges.  Leaving  aside  theoretical  considerations 
the  present  interest  is  only  that  the  basis  of  accounting 
be  not  changed  without  corresponding  reconciliation  of 
the  figures.  The  Income  Accounts  for  several  years  are 
required  for  a  fair  consideration  of  a  corporation's  earn- 
ing power.  If,  therefore,  we  find  that  in  1914-1915-1916 
insurance,  rent  and  taxes  have  been  treated  as  general 
expenses,  and  in  the  next  two  years  as  part  of  fixed 
charges,  the  Income  Accounts  are  not  strictly  com- 
parable until  adjusted. 

Income  Accounts  are  usually  lamentably  incomplete 
and  presented  only  in  devitalized  form.  To  the  extent 
that  they  are  lacking  in  definiteness  and  detail  they  are 
baffling  to  intelligent  speculation  and  investment. 

As  with  balance  sheets,  analysis  of  Income  Accounts  is 
futile  unless  the  results  of  all  activities  are  combined  in 
a  consolidated  form  of  Income  Account  in  which  all  the 
profits  and  losses  of  all  the  subsidiaries,  if  such  there  are, 
appear.  Unless  such  an  Income  Account  is  presented, 
unpleasant  information  may  easily  be  hidden. 

Suppose  the  A,  B  &  C  Steel  Company  has  five  sub- 
sidiaries, of  which  four  contribute  in  the  form  of  divi- 
dends some  $500,000  to  the  net  income  of  the  holding 
company.  Suppose  the  other  sustains  a  net  loss  of 
$250,000.  It  has  proved  very  possible  to  take  into  the 
Income  Account  of  such  a  corporation  the  dividends 
received  without  a  word  as  to  any  loss  sustained.  The 
backslider  simply  does  not  figure  in  at  all.  In  fact, 


Consistent  Form  Necessary  169 

losses  may  be  so  concealed  indefinitely.  On  the  other 
hand,  unless  a  Consolidated  Income  Account  is  shown, 
extraordinary  profits  may  be  concealed  without  difficulty 
by  having  the  thriving  subsidiary  declare  in  dividends 
only  a  small  fraction  of  actual  gains.  In  order  to  have 
a  complete  basis  of  analysis  a  holding  corporation  must 
present  Consolidated  Balance  Sheets  and  Income  Ac- 
counts and  Balance  Sheets  and  Income  Accounts  of  each 
subsidiary. 

On  the  following  page  will  be  found  a  condensed 
comparative  income  account  (styled  Profit  and  Loss  Ac- 
count) published  by  the  Federal  Reserve  Board  from 
forms  prepared  for  the  Federal  Trade  Commission  by 
the  American  Institute  of  Accountants.  This  has  been 
published  as  a  tentative  proposal  for  a  simple  standard 
form.  It  has  been  accepted  by  some  of  the  largest 
financial  interests  as  satisfactory  for  use  in  most  in- 
dustrial lines  applying  only  by  adaptation  in  such  lines 
as  service  corporations  for  example: 


170          How  to  Analyze  Industrial  Securities 

Federal  Trade  Commission  Suggested  Comparative  Income  Account 


\ 

ear  ending  — 

19  — 

19  — 

19— 

Gros8  sales  

$  

$  

s  

Less  outward  freight,  allowances,  and  re- 
turns   

Netsales  

Purchases,  net  

Less  inventory  end  of  vear  

Cost  of  sales  

Gross  profit  on  sales  

Selling  expenses  (itemized  to  correspond 
with  ledger  accounts  kept)  

Total  selling  expense  

General  expenses  (itemized  to  corre- 
spond with  ledger  accounts  kept)  .... 

Total  general  expense  

Administrative    expenses    (itemized   to 
correspond  with  ledger  accounts  kept) 

Total  administrative  expense  

Total  expenses  

Net  profit  on  sales  

Other  income: 

Interest  on  notes  receivable,  etc  ... 

Gross  income  

Deductions  from  income: 

Interest  on  notes  payable  

Total  deductions  

Deduct  special  charges  to  profit  and  loss 

Surplus  beginning  of  period  

Dividends  paid  

Surplus  ending  of  period  

XXXVII 

Gross  Sales 

GROSS  Sales  or  Gross  Earnings  usually  head  a 
corporation's    Income    Account.      This    account 
should  designate  the  corporation's  total   receipts 
from  regular  corporation  operations  before  any  deduc- 
tion for  cost  or  expense  has  been  made. 

Of  course,  Gross  Earnings  is  the  proper  account  name 
in  the  case  of  a  corporation  depending  for  its  income, 
say,  upon  the  licensing  of  machines  or  patents,  but, 
as  always,  in  examining  reports  one  cannot  believe  "half 
of  what  he  sees."  Since  earnings  indicate  corporate 
progress  the  temptation  to  pad  them  becomes,  in  times 
of  stress,  acute.  No  earning  is  bona  fide  unless  entirely 
realized.  Yet  in  times  innumerable  have  supposed  in- 
creases in  the  value  of  real  estate  or  of  inventories  been 
considered  as  actual  profits  by  managements  anxious  to 
make  a  showing,  neglecting  the  "cost  or  market  value, 
whichever  is  lower"  edict  of  all  sound  accountants. 
Even  estimated  profits  from  contracts  not  yet  completed 
have  been  drafted  to  reinforce  an  otherwise  unpromising 
Income  Account.  Such  procedure  indicates  the  neces- 
sity of  certification  of  the  Income  Account  by  a  first  class 
firm  of  public  accountants,  given  unlimited  authority,  be- 
fore Income  can  be  credited  entirely.  The  account  Gross 
Sales  or  Gross  Earnings  is  not  seldom  omitted  because 

(171) 


172         How  to  Analyze  Industrial  Securities 

of  the  antiquated  belief  that  from  its  examination  com- 
petitors may  gain  damaging  information.  Yet  a  more 
sinister  motive  may  be  possible. 

As  showing  the  possibilities  of  manipulation  of  figures 
a  steel  products  corporation  showed  one  year  a  sudden 
increase  in  Gross  Sales.  Investigation  proved  that  the 
company  had  sold  a  large  plant  (capital  asset)  and  cred- 
ited the  amount  to  Gross  Sales. 

Obviously  a  comparison  of  Gross  Sales  from  year  to 
year  will  show  whether  a  business  is  pleasantly  improv- 
ing in  volume  from  year  to  year  and  whether  sales  are 
consistent  or  subject  to  violent  fluctuations.  At  least 
equally  important  a  result  of  the  Gross  Sales  item  is  the 
light  to  be  derived  from  its  use  with  other  figures  in  de- 
termining the  trend  of  actual  profit. 

Suppose  a  company's  Gross  Income,  or  Gross  Sales, 
minus  the  cost  of  materials,  labor  and  other  ordinary 
operating  costs,  has  been  $100,000,  $110,000  and  $125,000 
per  annum.  A  very  fair  indication  this,  apparently,  and 
if  no  other  figures  were  available  or  suspected  as  holding 
further  significance,  would  be  considered  splendid  busi- 
ness on  a  reasonable  capitalization.  But  suppose  we  find 
that  the  Gross  Sales  have  been  $1,000,000,  $1,800,000  and 
$2,500,000,  showing  a  striking  but  not  at  all  unusual 
growth  in  some  lines  of  business.  The  cost  of  doing  the 
business,  with  maintenance  and  depreciation  but  not  in- 
terest and  dividends,  has  been  increasing  from  90  to  93.89 
to  95%  of  the  Gross  Sales,  leaving  net  earning  of  10,  6.11 
and  5%.  These  easily  derivable  figures  indicate  a  con- 
dition; demanding  scrutiny  because  a  small  further  de- 


Gross  Sales  173 


crease  in  the  Net  Profit  per  dollar  of  Gross  Sales 
would  obviously  be  dangerous.  Such  a  conclusion 
would  not  at  all  be  apparent  if  the  amount  of  Gross 
Sales  were  not  available.  "Large  business  and  small 
profits"  works  out  all  right  until  the  percentage  of 
profits  approaches  the  vanishing  point. 

When  available,  which  is  too  seldom,  the  amount  of 
Net  Sales  usually  makes  a  better  measure  of  compari- 
son than  Gross  Sales.  This  is  because  Net  Sales  is 
the  Gross  less  "outward  freight,  allowances  and  re- 
turns/' if  any.  Though  often  not  important,  the  dif- 
ference between  Gross  Sales  and  Net  in  some  lines  is 
considerable,  sometimes  including  intra-subsidiary  op- 
erations. It  is  obvious  that  in  such  cases  Net  Sales 
is  an  important  account  and  without  it  valuable  com- 
parisons cannot  be  made. 


XXXVIII 
Gross  and  Net  Profits 

AFTER  satisfying  one's  self  as  to  what  of  little  or 
much  importance  may  lie  in  the  apparently  simple 
account  Gross  Sales  or  Gross  Income,  one  soon 
arrives  at  the  next  stopping  point  on  a  typical  Income  Ac- 
count. This  account,  Net  Sales,  may  or  may  not  be  indi- 
cated on  reports  submitted  to  the  stockholders.  Outward 
freight  costs,  allowances  for  damage,  and  return  mer- 
chandise are  subtracted  from  Gross  Sales,  leaving  Net 
Sales.  A  company  having  operating  subsidiaries  should 
also  eliminate  inter-company  sales  before  giving  Net 
Sales. 

Few  corporations  publish  the  next  items:  Inventory 
at  Beginning  of  Year,  Plus  Purchases,  Less  Inven- 
tory at  End  of  Year — which  of  course  bring  out  the 
Costs  of  Sales,  since  the  result  is  the  value  of  the 
amount  of  the  goods  sold  from  the  beginning  of  the 
year.  In  manufacturing  corporations  the  Factory  Cost 
of  manufacturing  takes  the  place  of  the  item,  Pur- 
chases. Factory  Cost  includes  such  items  as  cost  of  ma- 
terials, labor,  superintendence,  rent,  royalties,  insurance, 
real  estate  taxes,  heat,  light  and  power,  supplies,  re- 
pairs, renewals,  depreciation  and  obsolescence.  When 
the  Cost  of  Sales  is  available  as  well  as  the  Gross  Sales, 
the  subtraction  of  Cost  of  Sales  from  Gross  Sales  ob- 
viously gives  Gross  Profits  on  Sales. 

(175) 


176          How  to  Analyze  Industrial  Securities 

Analysis  is  usually  most  helpful  when  considered  in 
connection  with  the  results  of  different  years,  that  is, 
by  comparison  of  like  items  and  results.  It  is  sug- 
gested that  the  ratio  of  Gross  Profits  to  Net  Sales  be 
calculated  and  compared,  one  year  with  another,  to  see 
whether  a  corporation  is  showing  an  increasing  or  de- 
creasing control  over  results.  Such  comparisons  must 
be  made,  however,  with  intelligence.  Conditions  in  gen- 
eral industry  and  results  of  other  corporations  in  the 
same  line  must  be  considered.  Nothing  is  more  futile 
than  attempting  to  compare  figures  without  considera- 
tion of  all  vital  factors.  Except  in  times  of  inflation  it 
must  be  expected  that  in  many  lines,  electrical  machinery 
for  example,  competition  will  tend  to  decrease  the 
Ratio  of  Gross  Profits  to  Net  Sales  in  spite  of  the  best 
management. 

Unfortunately,  until  industrials  are  forced  to  report 
every  item  of  revenue  and  expenditure,  as  must  the  rails, 
it  will  not  be  possible  to  compute  ratios  to  Net  Sales 
with  any  certainty  unless  one  positively  knows  that  the 
basis  of  making  up  the  accounts  has  not  changed,  and 
that  the  basis  of  consistent  accounts  is  understood.  It 
is  not  remarkable  that  under  the  guise  of  items  making 
up  the  cost  of  goods  sold,  large  amounts  may  be  in- 
cluded in  Factory  Cost  as  repairs  and  similar  expense 
accounts  which  are  actually  expended  for  replacement  of 
machinery  with  materially  larger  production  than  that 
scrapped  and  any  number  of  other  improvements  and  ex- 
tensions. Such  "plowing  in  of  earnings"  takes  place 
even  under  the  stringent  rules  which  govern  railroad  ac- 


Gross  and  Net  Profits  177 

counting  and  is  usual  with  prosperous  industrials.  So 
it  is  possible  that  a  decrease  in  Ratio  of  Gross  Profits  to 
Net  Sales  may  simply  indicate  extreme  conservatism  of 
management. 

On  the  other  hand,  if  a  consistent  decrease  in  the  Ratio 
of  Gross  Profits  to  Net  Sales  is  caused  by  increased  cost 
of  labor,  power,  necessary  repairs,  the  decrease  must  be 
considered  unfavorable. 

Since  items  of  cost  are  given  in  few  reports,  unless  it 
can  be  proved  that  maintenance  and  depreciation  charges 
have  been  neglected,  an  increasing  Ratio  of  Gross 
Profits  to  Net  Sales  must  be  regarded  as  resulting  from 
actual  increasingly  profitable  operation,  and  a  decreasing 
ratio  as  at  least  dubious. 

Seldom,  outside  of  the  books  themselves  or  the  reports 
of  a  public  accountant,  will  we  find  the  next  three  items 
segregated :  Selling,  General  and  Administrative  Ex- 
pense. In  fact  the  differentiation  made  by  accountants 
may  be  somewhat  arbitrary.  Selling  expense  will  take 
in  such  items  as  salaries,  travelling  and  advertising  ex- 
penditures. General  expense,  printing,  general  office  ex- 
pense, etc.,  while  Administrative  Expenses,  when  given 
separately,  refers  to  salaries  of  officers,  directors'  fees, 
and  possibly  legal  expense.  An  unusual  increase  in  any 
item  may  involve  important  considerations  to  the  stock- 
holder. For  example  more  than  one  corporation  is  now 
investing  in  advertising  "expense"  to  very  large  figures, 
building  up  good  will  for  the  future,  and  as  deliberately 
cutting  down  taxable  profits. 

Gross  Profits  on  Sales,  less  Selling,  General  and  Ad- 


178          How  to  Analyze  Industrial  Securities 

ministrative  Expense,  gives  Net  Profits,  sometimes 
called  Net  Profits  on  Sales.  The  Ratio  of  Net  Profits 
to  Net  Sales  for  different  years  should  be  calculated,  and 
compared,  but  with  the  same  caution  as  with  comparison 
of  the  previous  ratio  referred  to:  that  of  Gross  Profits 
to  Net  Sales. 

Of  course,  it  is  useless  to  compare  a  company  having 
normally  a  rapid  turnover,  such  as  a  biscuit  company— 
with  a  ratio  of  net  profits  to  net  sales  of,  say,  9% — witb 
that  of  a  steel  corporation  which  scarcely  turns  over  its 
capital  once  a  year,  and  retains  25  cents  as  net  profits  out 
of  each  dollar  of  net  sales. 

Published  reports  nearly  always  give  Net  Profits  when 
Gross  Sales  are  given,  and  the  relation  of  the  two  ex- 
pressed in  per  cent,  is  usually  the  most  valuable  on  the 
whole  of  any  that  can  be  worked  out  from  the  Income 
Account,  as  it  is  reached  after  all  the  primary  cost  and 
expense  items  are  supposed  to  have  been  taken  into  con- 
sideration, no  matter  to  what  account  debited.  Too  often 
however  a  corporation  will  skimp  renewals,  depreciation 
and  obsolescence  in  poor  years,  relying  on  appropriations 
from  surplus  in  fat  years  to  cover.  The  proper  policy 
is  that,  as  far  as  possible  these  items  be  considered  as 
part  of  cost,  bad  years  or  good.  Without  detailed  ac- 
counts, or  knowing  pretty  well  the  policy  of  an  indi- 
vidual corporation  it  is  difficult  to  judge  which  policy 
has  been  taken. 


XXXIX 
Other  Income 

SPECIAL  profits  or  losses  should  be  separated  from 
those  due  to  the  normal  operations.  These  special 
results  should  show  in  the  "Other  Income."  From 
1914  to  1918  inclusive  several  large  industrials  organized 
subsidiaries  and  through  them  entered  a  field  formerly 
strange  to  them — that  of  war  business.  This  has  proved 
decidedly  unprofitable  in  several  instances.  The  results 
of  all  such  outside  activities,  favorable  or  unfavorable, 
should  be  added  to  or  deducted  from  the  net  earnings 
and  not  consolidated  with  the  general  normal  income. 

The  most  usual  source  of  Other  Income  is  from  the 
receipt  of  interest  and  dividends  from  securities  owned. 
If  this  amount  is  large  its  continuance  or  increase  is  a 
matter  of  importance  to  be  verified  only  by  an  examina- 
tion of  the  securities.  Many  corporations  have  issued 
their  own  securities,  usually  bonds,  with  which  to  pay 
for  securities  considered  at  the  time  of  purchase  highly 
desirable  for  holding  in  the  corporate  treasury.  The 
well-being  of  the  acquired  securities  may  then  be  of  para- 
mount importance  because  discontinuance  of  the  income 
may  spell  disaster  to  the  purchasing  corporation. 

The  American  Sugar  Refining  Company  has  in  past 
years  of  liberal  profits  placed  in  its  treasury  as  invest- 
ments so  many  good  stocks  that  its  Other  Income  is  rela- 

(179) 


180          How  to  Analyze  Industrial  Securities 

tively  large.  Its  investment  account  stands  at  some 
$30,161,130,  from  which  its  income  in  1918  was  $5,- 
202,693;  as  compared  with  normal  business  profits  of 
$6,661,684.  In  addition  the  company  received  $687,845 
interest  on  loans.  The  company's  stock  naturally  has 
become  a  prime  investment  favorite  with  preferred 
dividends  and  most  of  the  common  disbursement  not 
dependent  upon  the  success  of  the  company's  primary 
operations. 

It  is  quite  usual  for  some  classes  of  corporations  to  be 
interested  in  others  which  perform  special  duties.  The 
General  Electric  Company,  for  example,  owns  practically 
all  the  common  stock  of  the  Electric  Bond  and  Share 
Company,  which  promotes  public  utilities  requiring  elec- 
trical equipment. 

Further  usual  sources  of  Other  Income  are  interest  re- 
ceived on  bank  balances  and  rentals  of  property  owned. 
Proceeds  of  capital  assets,  such  as  a  plant  or  a  parcel  of 
land,  are  often  included  in  Other  Income.  Such 
practice  does  not  seem  justified.  It  is  not  all  In- 
come any  more  than  the  gross  proceeds  from  any  other 
sale.  It  is  more  logical  practice  to  include  only  the  profit 
on  any  such  transaction,  leaving  the  balance  sheet  and 
Income  Account  in  accord.  It  is  still  better  practice  to 
include  such  unusual  items  with  the  Profit  and  Loss 
later  on,  in  order  to  keep  the  Other  Income  account  for 
different  years  comparable, 


XL 
Total  or  Gross  Income 

THE  Other  Income  added  to  the  Net  Profits  gives 
the  Total  or  Gross  Income.  From  the  Total  In- 
come are  deducted  Federal  taxes,  Interest  on  bank 
loans  and  bonds,  Amortization  of  bond  discount,  and 
cash  discounts  on  sales.  These  expenditures  are  sub- 
tracted from  Total  Income  because  they  are  considered 
expenses  of  capital,  the  expense  of  obtaining,  using  and 
protecting  capital,  set  up  separately  in  order  to  3how 
what  the  Total  Income  would  be  if  there  were  no  ex- 
penses in  connection  with  capital.*  Interest  actually  be- 
longs among  the  expenses  of  capital,  of  course,  but  is 
like  Federal  taxes  usually  separated  in  published  reports 
for  convenience  in  analysis. 


See  Wildman's  "Principles  of  Accounting,"  231-275. 


(181) 


XLI 

Interest 

INTEREST  charges  should  be  separated  into  charges 
against  short-time  debts,  such  as  bank  loans  and  ac- 
counts payable.  If  the  balance  sheet  shows  a  small 
amount  of  bank  loans  while  the  income  account  shows  a 
large  charge  for  short-time  loans,  it  is  probable  that  the 
company  is  far  back  on  its  payments  for  goods  and  is 
paying  substantial  interest  to  trade  creditors.  This  may 
be  evidence  of  weakness  requiring  attention.  If  the  in- 
terest account  is  not  separated  it  is  not  difficult  to  find 
out  how  much  has  been  paid  for  short-time  loans  from 
banks  or  trade  creditors. 

Suppose  the  total  interest  paid  is  $100,000  and  the  bal- 
ance sheet  shows  $500,000  5%  bonds  and  $500,000  6% 
notes,  the  funded  debt  would  require  $25,000  +  $30,000 
or  $55,000  showing  $45,000  applied  to  unfunded  debts. 
If  fair  interest  rates  were  about  5%,  the  balance  sheet 
would  probably  include  twenty  times  the  interest  charges, 
or  $900,000,  of  unfunded  interest-bearing  loans. 


(183) 


XLII 
Profit  and  Loss — Surplus 

A^TER  interest  charges  have  been  paid,  leaving  Net 
Income,  a  company  usually  has  several  additional 
Profit  and  Loss  items  to  take  account  of.  Profits 
made  on  sales  of  real  property  or  securities  are  often 
and  preferably  added  or  credited  to  the  Net  Income  left 
when  interest  charges  have  been  charged  off.  Amounts 
written  off  to  cut  down  accounts  such  as  Goodwill, 
Patent  and  Organization  accounts  are  next  subtracted 
or  debited.  The  amounts  written  off  are  likely  to  be  de- 
termined by  the  prosperity  of  the  year's  business.  In 
poor  years  the  amount  written  off  will  be  small,  one  of 
the  measures  taken  to  show  satisfactory  Surplus  for  the 
year. 

Most  companies  make  up  their  Income  Accounts  so 
that  all  "Profit  and  Loss"  items  are  entered  before  inter- 
est is  deducted.  This,  however,  is  quite  contrary  to  the 
well  accepted  principles  of  considering  them  "Profit  and 
Loss"  credits  and  debits. 

It  is  technically  correct  to  add  the  Surplus  at  Beginning 
of  Period  directly  to  the,  "Profit  and  Loss  for  Period,"  as 
per  page  170,  then  to  deduct  dividends,  the  preferred 
taking  precedence,  leaving  Surplus  Ending  of  Period. 

In  practice  most  corporations  show  the  Profit  and  Loss 
for  Period — usually  loosely  called  Net  Profits — deduct 

(185) 


186          How  to  Analyze  Industrial  Securities 

dividends  and  add  any  remainder  to  the  Surplus  Be- 
ginning of  Period.  The  problem  as  to  dividend  declara- 
tions has  already  been  discussed  on  pages  61-67. 


XLHI 
Margin  of  Safety — Average  Profits 

THE  Margin  of  Safety  of  bonds  is  the  proportion 
of  Net  Income  left  after  paying  all  fixed  charges. 
A  company  which  earns  $1,000,000  and  has  $200,- 
000  fixed  charges,  leaving  $800,000  or  80%  Margin  of 
Safety  above  fixed  charges,  should  be  in  better  condition 
than   if  it  had  the   same   earnings   and  $800,000   fixed 
charges,  or  a  Margin  of  Safety  of  20%. 

The  Margin  of  Safety  over  preferred  stock  may  easily 
be  reckoned  by  including  after  Profit  and  Loss  entries, 
if  any,  the  required  dividends  on  the  stock  with  the  fixed 
charges  before  figuring  the  percentage  and  the  Margin  of 
Safety  over  the  common  stock  by  including  its  dividend 
return  with  the  fixed  charges  and  the  preferred  dividend 
returns.  Suppose  with  $1,000,000  earnings,  fixed  charges 
are  $200,000,  preferred  dividends  $200,000  and  common 
dividends  $200,000.  The  fixed  charges  and  all  dividends 
are  $600,000  and  the  remainder  $400,000,  is  40%,  which 
is  the  Margin  of  Safety  over  the  common  stock  disburse- 
ments. 

The  strength  of  a  corporation  may  be  fairly  tested  by 
the  Margin  of  Safety,  checking  up  other  conclusions.  If 
the  Margin  of  Safety  over  the  different  classes  of  se- 
curities is  increasing,  other  things  being  equal,  the  cor- 

(187) 


188  How  to  Analyze  Industrial  Securities 

poration's  bonds  and  stocks  may  be  considered  as  grow- 
ing safer  and  stronger. 

No  figure  given  out  to  appeal  to  investors  is  more 
common  or  more  deceptive  than  that  of  "Average 
Profits"  (usually  really  Total  Income  less  taxes,  royal- 
ties, insurance  and  cash  discounts)  for  3,  4  or  5  years. 
It  would  seem  that  such  a  figure,  unsupported,  would 
have  little  purpose  except  deception  were  it  not  that  in- 
vestment houses  are  often  forced  to  tell  a  story  not  at 
all  complete  because  of  the  unfortunate  proclivity  of 
the  typical  investor  to  be  scared  away  by  adequate  in- 
formation. Net  profits  may  run  $500,000,  $400,000, 
$200,000  and  $100,000,  yet  the  "average"  will  boldly 
stand  out  at  $200,000  per  year,  showing  interest  re- 
quirements on  a  bond  issue  of  $1,000,000  earned  six 
times. 

Net  Income  for  at  least  four  or  five  consecutive  years 
must  be  given  if  any  dependence  is  to  be  placed  on  con- 
sistency of  earning  power.  Having  the  results  by  sep- 
arate years,  a  simple  average  may  prove  helpful  if  con- 
ditions have  been  fairly  normal  throughout  the  years 
averaged.  Ofttimes  a  good  reason  exists  for  a  drop  in 
income  for  a  year  or  so,  say  a  general  depression  such  as 
was  the  initial  result  of  the  beginning  of  the  recent  war, 
a  sympathetic  strike,  etc.  To  the  careful  man,  the  whole 
record  explained,  even  when  containing  a  time  of  lean 
profits,  is  more  attractive  than  the  always  dubious  mys- 
tery of  "Average  Profits." 


New  Promotions. 

FOUR    hundred    and    sixteen    advertisements    of 
stock  offerings  appeared  in  one  Sunday  edition  of 
a  New  York  newspaper  some  years  ago.     Of  all 
these  glittering  opportunities,  only  one  is  today  worthy 
of  a  place  outside  of   Smythe's  "List  of  Obsolete  Se- 
curities."    A  stubborn  wealthy  dupe  still  plays  angel  to 
the  exception  rather  than  admit  his  lack  of  judgment. 
Every  boom  time  produces  a  generous  supply  of  new 
corporations  and  recapitalization  of  older  concerns.   The 
present  year  is  no  exception.     The   day  is  dull  which 
does   not   herald   the   offering   of    some   new    chemical, 
steel  or  rubber  flotation. 

A  part  will  outlive  the  coming  storms,  because  pro- 
moters have  certainly  profited  6y  the  experience  of  the 
nineties  and  the  earlier  years  of  the  present  century. 
Capitalization  is  mostly  in  common  stocks  which,  upon 
the  appearance  of  choppy  weather,  require  no  return. 
Still,  prospective  investors  can  well  look  ahead  a  bit 
before  exchanging  the  results  of  years  of  toil  for  well 
executed  steel  engravings.  An  investor,  at  least  theo- 
retically, buys  for  a  dividend  or  interest  return  on  his 
capital,  and  it  boots  him  little  if  his  securities  escape 
assessment  yet  reach  a  position  of  hopelessness  from  a 
yield  standpoint. 

(189) 


190         How  to  Analyze  Industrial  Securities 

Of  course,  the  more  speculative  an  enterprise,  the 
more  careful  should  the  investor  scan  the  sky.  At  the 
height  of  prosperity,  optimism  is  general.  Offerings  of 
stocks  in  companies  ranging  from  tooth  powder  to  auto- 
mobiles scream  forth  from  circulars,  booklets  and  peri- 
odicals, and  even  telegrams.  Legitimate  enterprises 
may  survive  depressing  times,  but  it  must  be  remem- 
bered that  flotations  made  in  times  unusually  prosperous 
are  not  usually  put  out  on  a  basis  which  inspires  de- 
served confidences.  Even  if  an  enterprise  is  not  of  a 
speculative  nature,  say  staple  hardware  supplies,  calcu- 
lations for  the  future  based  on  boom  time  business  are 
misleading.  Also,  machinery,  supplies  and  plants  even 
at  bona  fide  valuation  represent  figures  which  are  cer- 
tain to  appear  excessive  later  on. 

At  the  end  of  a  long  period  of  depression,  when 
clamors  of  ruin  still  are  heard,  but  when  prices  of  com- 
modities are  low  and  labor  efficient,  then  is  the  time  to 
take  an  interest  in  new  propositions. 

Some  must  take  a  chance.  Some  must  pioneer,  build 
tooth  powder  factories,  catsup  plants,  and  finance  mov- 
ing pictures.  The  country  must  go  on  developing.  Yet 
the  best  of  new  companies  have  their  troubles,  and,  by 
and  large,  Andrew  Carnegie  was  certainly  right  when  he 
remarked  (though  perhaps  apropos  of  something  else) 
that  "Pioneering  does  not  pay."  Some  must  pioneer, 
but  as  a  principle,  the  early  securities  holders  in  a  cor- 
poration lose.  More  than  95%  of  times  intending  inves- 
tors or  speculators  would  do  best  to  file  away  promising 
prospects  or  advertisements  instead  of  purchased  certi- 


New  Promotions  191 


ficates.  They  will,  as  a  rule,  either  escape  the  burdens 
of  reorganization,  or  at  least  be  able  to  purchase  the 
securities  later  at  a  more  favorable  basis  after  hopes  and 
realities  have  had  an  apportunity  to  convene.  It  is  sel- 
dom possible  to  keep  up  unwarranted  market  prices  for 
any  length  of  time  without  an  obvious  showing  of  weak- 
ness, as  has  been  strikingly  illustrated  in  stocks  such  as 
Davison  Chemical,  Federal  Dyestuffs,  Pugh  Stores  and 
Emerson  Motors,  to  cite  recent  flotations.  In  fact,  the 
market  for  certain  important  stocks,  enthusiastically  in- 
troduced, simply  vanishes  within  a  few  weeks  of  the  date 
of  offering. 

"Out  of  town"  purchasers  should  always  confirm 
prices  on  securities  urged  upon  them.  Marked  discrep- 
ancies often  are  shown.  As  an  example,  which  is  obvi- 
ously unusual,  the  writer  a  few  years  ago  happened  to 
be  in  the  Big  Bend  country  of  the  State  of  Washington. 
A  new  stock  was  being  sold  in  large  quantities  in  the 
city  of  Pullman  at  $54.00  per  share,  which  was  selling 
in  Boston  at  $4.00  per  share,  and  which  is  now  en- 
tirely worthless. 

It  is  remarkable  that  the  more  venturesome  the  nature 
of  a  new  offering  of  stock  the  more  strongly  do  the 
sellers  emphasize  the  attractive  features  as  an  invest- 
ment. An  exceptional  instance  is  refreshing. 

At  the  time  the  Triangle  Film  Corporation  was 
floated,  with  Messrs.  Griffith,  Ince,  Sennett,  Bauman 
&  Kessel  and  Aitken,  Mr.  Aitken  actually  came  out 
warning  the  public  against  too  great  expectations  and 
pointing  out  the  speculative  nature  of  the  business. 


192        How  to  Analyze  Industrial  Securities 

Such  a  step  was  revolutionary,  but  highly  laudable,  for 
such  a  stock  is  at  best  only  a  pure  speculation.  Unfor- 
tunately, the  warning  was  only  too  well  founded.  The 
company  has  not  done  as  well  as  expected  and  the 
stock  has  drastically  declined. 

A  large  part  of  new  propositions  involve  recapitali- 
zation of  old  established  businesses.  On  the  face  of  the 
statements  usually  made,  such  securities  seem  entirely 
safe,  yet  history  writes  a  doleful  tale  of  a  large  part  of 
these  flotations. 

Most  of  them  are  made  at  the  wrong  time,  i.  e.,  at 
the  height  of  prosperity.  An  example  of  this  is  the 
experience  of  the  Milliken  Brothers,  which  floated  a 
large  issue  of  bonds  in  1906,  erecting  a  large  steel  plant 
at  top  prices  for  labor  and  material.  The  company  has 
been  in  the  hands  of  receivers  since  the  following  year. 

A  substantial  proportion  of  grossly  enlarged  capitali- 
zations occur  because  of  importunities  of  underwriters 
than  actual  needs  of  the  corporations  affected.  Exam- 
ples of  prosperous  corporations  burdened  by  over-ex- 
pansion are:  The  M.  Rumely  Company,  McCrum-How- 
ell,  and  the  Emerson-Brantingham  Company.  Of  course, 
a  small  issue  of  stocks  or  bonds  by  a  ccmpany  which 
has  been  consistently  prosperous  over  a  series  of  years, 
with  statements  which  are  complete  enough  to  admit  ac- 
curate analysis,  will  usually  turn  out  all  right  if  issued 
in  normal  times.  This  is  not  the  class  of  securities  re- 
ferred to  in  this  discussion. 

Since  the  bulk  of  flotations  is  made  during  boom 
periods,  it  is  not  surprising  that  the  original  sale  price 


New  Promotions  193 


of  good  quality  securities  is  usually  higher  than  that 
prevailing  within  a  comparatively  short  time.  J.  I.  Case 
Threshing  Machine  preferred,  Cuba  Cane  Sugar  pre- 
ferred (a  marked  decline  occurred  in  the  latter  issue 
before  events  leading  to  the  Cuban  rebellion  or  the  more 
recent  slump  in  sugar  prices  developed),  and  the  United 
States  Rubber  bonds,  are  notable  cases  in  point. 

In  spite  of  all  the  warnings  of  financial  history  the 
most  toothsome  bait  spread  by  promoters  of  the  wily 
variety  is  the  glorious  history  of  similar  enterprises.  Be- 
fore me  is  a  full  page  advertisement  of  a  company 
which  at  the  very  height  of  the  bull  market  of  1916 
proposed  to  manufacture  paper  from  "sugar  cane  refuse. 
No  earnings  were  presented,  no  list  of  officers  or  di- 
rectors, not  the  name  of  a  single  individual  except  Mr. 
Alexander  Graham  Bell,  Queen  Isabella  and  Columbus, 
no  balance  sheet,  no  plant  in  operation,  nothing  to  prove 
that  such  a  process  is  practical,  and  yet  the  heading 
of  a  page  of  the  New  York  World  for  Sunday,  Octo- 
ber 15,  1916,  reads,  "Do  you  want  to  turn  $100  into 
$15,000?"  with  a  subtitle,  "Or  have  a  $10  bill  grow  into 
the  price  of  a  good  automobile?" 

Another  advertisement  at  hand  calls  attention  to  the 
necessity  of  "investing  at  the  start  of  the  company." 

"To  make  the  greatest  profit  you  must  invest 
at  the  start  of  the  company.  In  the  cases  of 
original  investment,  in  the  stock  of  Goodrich, 
$100  has  returned  $69,600;  Dunlap,  $100  has 
returned  $50,000;  Kelly-Springfield,  $100  has 


194         How  to  Analyze  Industrial  Securities 

returned  over  $10,000;  Firestone,  $100  has  a 
value  of  $9,168;  Fisk,  $100  has  returned 
$12,400." 

A  perfectly  responsible  tire  company  recently  mar- 
keted its  shares  in  a  legitimate  and  businesslike  man- 
ner. For  a  time  the  price  held  well,  then  late  in  1916 
slumped  off,  and  announcement  was  just  recently  made 
that  dividends  have  not  been  earned.  The  company 
had  been  unfortunate  in  a  "run"  of  the  tires. 

Does  the  new  company  propose  to  build  automobiles? 
The  name  Ford  appears  in  print  as  soon  as  in  thought. 
By  the  age  of  forty,  after  years  of  discouraging  expe- 
rience, Henry  Fond  had  built,  not  manufactured,  just 
eight  cars.  Meanwhile,  two  companies  formed  to  capital- 
ize his  genius  had  failed. 

Is  the  project  to  do  with  electricity?  Then  the  pos- 
sible chance  of  purchasing  Bell  Telephone  stock  is 
brought  out.  One  dollar  invested  woke  up  as  a  million, 
etc.  Nothing  is  said  of  the  years  intervening  when  the 
shares  were  worthless,  nor  of  law  suits  costing  $350,000 
— decided  on  a  fluke.  Is  the  new  project  in  agricul- 
tural machinery?  The  success  of  the  McCormick  plant 
is  ushered  forth.  McCormick  failed  twice.  Original 
"investors"  secured  experience.  The  original  backers 
of  most  successful  phonograph  companies  lost. 

The  path  of  difficulties  to  be  faced  by  a  new  propo- 
sition is  splendidly  indicated  by  the  experience  of  1915 
and  1916.  Large  steel  and  railway  equipment  com- 
panies took  hundreds  of  million  of  dollars  of  contracts 
from  European  Governments.  Mind,  the  organizations 


New  Promotions  195 


already  existed,  the  business  was  in  allied  lines,  pay- 
ment money  was  in  the  bank  in  advance,  and  contracts 
were  signed  at  outrageous  terms  that  not  only  promised 
splendid  profits,  but  that  any  new  construction  neces- 
sary was  to  stand  as  gifts  at  the  completion  of  the  first 
work.  Yet  before  the  end  of  1916,  stock  prices  dis- 
counted blasted  hopes.  For  one  reason  and  another, 
profits  faded,  and  few  indeed  were  the  firms  which  have 
actually  made  money  in  war  orders.  Several  of  the 
largest  contractors  were  obliged  to  beg  mercy  from 
the  governments  which  they  planned  to  gouge.  Included 
among  the  disappointed  corporations  were  companies 
which  had  been  in  the  ammunition  business  for  years. 
If  long  established,  smoothly  running  firms  run  into 
the  difficulties  encountered  by  the  war  contractors  of 
1914  and  1915,  consider  the  chance  of  the  innocent  in- 
vestor in  an  absolutely  new  project,  with  no  plant  built, 
with  business  only  in  prospect  and  the  future  only 
made  bright  by  "painting  the  blue,"  as  stock  sales- 
men say. 

Of  course  a  new  project  must  promise  well  or  there 
would  be  absolutely  no  object  ever  in  venturing.  Cer- 
tainly no  basis  is  evident  for  the  investment  in  1916  for 
huge  sums  of  money  in  preferred  stocks  and  in  bonds 
of  new,  untried  enterprises,  where  the  possible  return 
was  only  from  5  to  7%  at  a  time  when  British  Secured 
5%  bonds,  convertible  into  British  twenty-year  bonds 
free  or  all  British  taxes  were  selling  on  a  basis  of  over 
6%  !  A  convertible  feature  or  a  bonus  of  stock  is  often 
included  with  an  issue  of  bonds  of  a  new  corporation. 


196         How  to  Analyze  Industrial  Securities 

This  is  entirely  desirable,  but  the  convertible  feature  or 
the  stock  must  be  carefully  analyzed.  The  speculative 
feature  may  be  quite  remote  from  probable  value. 

Yet  the  proposition  offering  a  certain  return  of  10% 
or  more,  will  upon  examination  nearly  always  develop 
glaring  fallacies  which  the  average  "investor"  overlooks 
because  he  finds  it  so  easy  to  believe  that  which  he  wishes 
to  believe.  This  human  failing  is  the  only  license  the 
questionable  promoter  or  "underwriter"  has  for  exist- 
ing. 

In  order  to  sharpen  the  appetite  of  prospective  inves- 
tors, earning  statements  are  sometimes  made  up  cover- 
ing not  realized  profit,  but  profit  to  be  derived  in  the 
future  from  contracts  made.  Such  procedure  is  not  un- 
common among  promoters  of  highly  speculative  secur- 
ities. Most  new  securities  have  earnings  only  in  pros- 
pect. One  recent  flotation  showed  weekly  earnings  by 
weeks  for  just  five  weeks. 

The  most  certain  indications  of  a  promotion  profitable 
only  to  the  promoter,  are  statements  that  contain  some 
reflection  against  Wall  Street  banks  and  methods.  Not 
that  Wall  Street  is  perfect,  but  the  writer  has  yet  to  see 
advertisements  of  securities  abusing  Wall  Street  methods 
which  would  stand  analysis. 

Perhaps  the  most  common  lure  cast  out  in  the  pro- 
motion of  new  securities,  is  a  price  below  par.  "You 
can  buy  this  stock  which  has  a  par  value  of  $10.00  for 
$4.00  a  share."  Of  course,  it  makes  little  practical  dif- 
ference whether  the  stock  is  sold  at  par  or  40%  of  par 
as  far  as  the  success  of  the  enterprise  is  concerned, 


New  Promotions  19? 


provided  enough  stock  is  sold  to  fill  capital  requirements. 
If  it  is  sold  at  40%  of  par,  just  two  and  one-half  times 
as  much  stock  must  be  sold  as  though  it  was  offered  at 
100%  of  face  value.  Each  share  sold  at  40%  of  par  is 
simply  worth  to  the  company,  and  so  to  the  purchaser, 
40%  of  a  share  disposed  of  at  nominal  or  par  value. 
Of  course,  the  more  stock  sold,  the  less  dividends  can  be 
declared  on  forthcoming  earnings. 

A  stock,  especially  one  of  $100  par  value,  sold  at  a 
discount,  often  has  a  better  market  than  one  sold  at  par, 
because  discount  securities  appeal  to  purchasers  having 
small  amounts  of  money  to  place.  Yet  practically  the 
same  result  is  obtained  by  making  the  par  $50  or  $10 
or  $5,  and  placing  the  offering  price  at  par  or  above. 
At  the  time  of  organization  banks  usually  sell  their 
stocks  at  a  premium  in  order  to  start  business  with  a 
surplus.  This  is  a  splendid  practice  and  could,  to  much 
advantage,  be  considered  in  the  promotion  of  other 
securities. 

When  no  par  is  given  at  all,  a  person  will  usually  take 
more  interest  in  the  actual  value  of  the  stock  than  when 
his  mind  is  distracted  by  an  arbitrary  par  value.  Some 
sort  of  analysis  is  necessary  to  show  value  at  all  when 
no  par  is  given. 

As  to  the  amount  of  stock  offered  in  a  new  proposi- 
tion, the  only  limits  are  that  enough  be  sold  to  assure 
sufficient  capital  to  go  ahead  with  the  project  in  view, 
making  liberal  allowances  for  contingencies,  and  that 
too  large  excess  be  avoided,  because  capital  not  well 
employed  will  require  returns  just  the  same,  as  that 


198         How  to  Analyze  Industrial  Securities 

which  is  absolutely  necessary.  The  American  Interna- 
tional Corporation  met  the  problem  well  by  issuing  stock 
upon  which  only  half  of  the  subscribed  cash  was  re- 
quired at  first.  As  more  capital  is  needed,  purchasers  will 
be  called  upon  for  the  remainder  of  their  subscription. 

Of  course,  good  management  is  indispensable  in  any 
enterprise,  old  or  new.  In  fact,  management  is  far  more 
important  than  the  nature  of  the  project.  Innumerable 
factories  which  once  made  furniture,  carpets,  paper, 
hats,  shoes  and  electric  bulbs,  are  now  deserted,  while 
companies  making  hair  tonics,  gold  divining  rods  and 
electric  belts,  are  declaring  regular  and  extra  dividends. 
Good  propositions  go  only  when  well  managed,  and 
good  management  may  pull  through  the  most  worthless 
projects. 

Some  of  the  best  propositions  possible  to  imagine 
have  died  from  one  or  more  of  the  ailments  to  which 
infant  corporations  are  prone.  What  more  logical  and 
promising  plan  than  cycle  car  manufacture — what  more 
solid  than  the  round  cotton  bale  proposition?  Such  ex 
amples  could  be  multiplied. 

On  the  other  hand,  many  successful  corporations,  es- 
pecially smaller  ones,  succeed,  but  only  to  the  advan- 
tage of  those  at  the  head,  officers  and  directors  absorb- 
ing the  profit  in  salaries  and  bonuses.  Such  practices 
have  injured  the  standing  of  the  motion  picture  cor- 
porations. 

It  is  not  surprising  that  the  American  International 
Corporation  has  successfully  floated  its  securities.  Its 
directorate  and  active  management  is  so  strong  that  capi- 


New  Promotions  199 


tal  would  follow  it  in  any  project.  In  fact,  the  activi- 
ties of  the  American  International  Corporation  cover 
or  will  cover  in  the  future  all  sorts  of  projects  all  over 
the  world.  If  one  must  speculate  on  an  entirely  new 
enterprise,  he  might  join  a  speculation  like  American 
International  Corporation.  It  was  one  of  the  successful 
flotations  of  the  war  period.  At  that,  it  would  not  be 
surprising  to  see  the  stock  sell  lower  than  the  original 
offering  price.* 

Local  pride  has  caused  innumerable  losses  to  invest- 
ors. A  new  project  appears  with  plans  to  build  a  fac- 
tory. Immediately  come  visions  of  large  construction 
and  permanent  payrolls.  Local  business  men,  from 
bankers  to  laundrymen,  figure  that  even  if  the  security 
investment  does  not  pay,  indirect  results  will  make  a 
liberal  stock  subscription  worth  while. 

No  doctrine  could  be  more  hopeless.  If  the  new 
enterprise  succeeds  on  its  merits,  well  and  good.  If  it 
does  not,  the  whole  community  will  suffer  and  not  only 
will  the  primary  investment  be  lost,  but  much  good 
money  will  be  thrown  after  bad.  A  small,  well-situated 
city  of  the  Middle  West  is  today  smaller  than  thirty 
years  ago.  Such  a  statement  seems  incredible,  but  it  is 
true.  The  loyal,  ambitious  business  men  have  backed 
enterprise  after  enterprise  only  to  have  it  fail.  In  no 
case  would  these  men  have  "invested"  had  the  new 
plants  located  in  the  next  town. 

*Since  this  was  printed  in  the  first  edition,  the  stock  sold  on 
a  basis  of  over  65  points  under  the  subscription  price,  and  showed 
beyond  controversy  the  difficulty  of  forecasting  the  future  of  a 
new  proposition. 


200        How  to  Analyze  Industrial  Securities 

Prospectuses  are  notable  for  what  they  do  not  con- 
tain. They  are  properly  constituted  to  attract  and  in- 
terest, but  the  information  contained  is  seldom  convincing 
to  the  sophisticated,  and  further  facts  must  be  de- 
manded to  afford  a  fair  basis  of  judgment.  To  be  sure, 
the  reputation  of  the  security  house  is  most  important, 
but  the  best  of  security  houses  make  mistakes  and  the 
prospective  investor  can,  by  analysis,  select  the  best 
securities  from  offerings  and  from  the  open  market,  se- 
curities both  new  and  old. 

The  New  York  Stock  Exchange  requires  a  "Listing 
Statement"  prior  to  the  admission  of  a  new  security  or 
additional  amount  of  an  old  issue.  This  "Listing  State- 
ment" must  contain  information  about  assets  and  lia- 
bilities, earnings  of  subsidiary  companies,  etc.  However 
valuable  these  statements  are,  and  they  are  valuable, 
their  usefulness  is  circumscribed  by  the  fact  that  no 
responsibility  is  taken  for  the  authenticity  of  the  in- 
formation imparted. 

When  a  corporation  issues  new  securities,  whether 
the  amount  be  large  or  small,  the  prospective  purchaser 
should  insist  upon  knowing  whether  the  balance  sheet 
represents  the  company's  status  before  or  after  the  re- 
ceipt from  the  securities  were  taken  into  the  company's 
treasury.  Balance  sheets  prior  to  the  financing  and 
subsequent  to  the  receipt  of  the  proceeds  from  the  un- 
derwriters should  be  shown  in  order  to  show  the  need 
and  the  immediate  disposition  of  the  funds. 

It  is  more  than  interesting  to  note  some  of  the  provi- 
sions of  the  British  Companies  Consolidation  Act  oi 


New  Promotions  201 


1908.  This  contains  296  sections  and  "governs  the 
careers  of  all  limited  liability  companies  from  the  cradle 
to  the  grave.  It  determines  the  essential  particulars 
which  their  prospectuses  shall  contain  and  regulates  their 
demise  when  the  hour  of  liquidation  strikes."* 

The  prospectus,  according  to  the  British  Companies 
Act,  must  contain  full  facts  of  the  nature  of  and  the 
extent  of  the  interest  of  every  director  in  the  plan  and 
promotion  of  or  in  the  property  proposed  to  be  acquired 
by  the  company,  and  the  number  of  founder's  or  man- 
ager's shares. 

The  amount  payable  in  cash,  shares  or  bonds,  to  a 
person  or  persons  for  any  property  acquired  or  pro- 
posed to  be  acquired,  specifying  the  amount,  if  any,  pay- 
able for  good  will. 

The  amount,  if  any,  paid  within  the  two  preceding 
years  or  payable,  as  commissions,  for  selling  stocks  or 
bonds. 

The  amount,  or  estimated  amount,  of  preliminary  ex- 
pense and  the  amount  paid  within  the  two  preceding 
years,  or  intended  to  be  paid  to  any  promoter  and  the 
consideration  for  any  such  payment. 

Dates  of  and  parties  to  every  material  contract,  ex- 
cept contracts  entered  into  in  the  ordinary  course  of 
business,  and  a  reasonable  time  and  place  at  which  any 
material  contract  or  copy  may  be  inspected. 

*Philip  Tovey,  "Prospectuses — How  to  Read  and  Un- 
derstand Them." 


202         How  to  Analyze  Industrial  Securities 

Liability  is  assumed  by  every  director  or  promoter, 
or  underwriter,  for  any  loss  or  damage  sustained  be- 
cause of  any  untrue  statement,  unless  for  good  reason 
responsibility  cannot  be  proved. 

Such  a  code  at  least  suggests  to  Americans  where  our 
practices  are  lacking.  Little  excuse  seems  possible  for 
the  owners  of  a  business  being  able  to  unload  proper- 
ties upon  "bankers"  or  "underwriters"  at  inflated  values, 
which  properties  are  then  unloaded  at  still  more  in- 
flated prices  to  the  innocent  investor. 

The  cost  to  the  promoters  of  the  properties  entering 
the  United  States  Steel  Corporation  was  public  property, 
also  the  payment,  large  as  it  was,  to  the  promoters. 
Promoters  and  underwriters  are  worthy  of  their  hire, 
but  their  relation  is,  as  should  be,  one  of  trust,  and  their 
compensation  should  always  be  public  information.  As 
it  is,  a  stock  may  be  floated  at  70  "retail,"  which  security 
houses  take  over  at  64,  while  the  promoters  buy  the 
properties  involved  at  an  equivalent  of  about  $27  per 
share.  What  chance  has  the  investor  at  $70  in  having 
a  security  which  will  steadily  return  income  on  the 
amount  invested? 

It  is  an  actual  fact  that  a  large  part  of  the  promotions 
made  are  taken  over  on  a  basis  which  gives  the  security 
promoter  65  per  cent,  of  receipts  from  investors.  25  per 
cent,  on  a  new  proposition  is  not  unreasonable  on  ac- 
count of  the  large  expense  necessary  and  the  risk  in- 
volved in  cases  where  the  promoter  and  underwriter 
assumes  large  responsibilities.  He  is  worthy  of  his  hire, 
but  when  only  35%  or  so  of  an  investors  money 


New  Promdtions  208 


reaches  a  company's  treasury  the  chances  for  success 
are  obviously  remote. 

Recently  a  new  motor  car  issue  was  offered  on  the 
market.  Its  promoters  have  apparently  made  every  ef- 
fort at  publicity.  For  example,  it  issued  an  official 
statement  showing  the  progress  made  from  the  first 
months  of  its  operation.  Here  was  cash,  for  example, 
of  $253,131,  real  estate  $61,300,  salaries  paid  $1,232, 
advertising  $7,102,  machinery  outlay  $22,559,  and  oppo- 
site the  amount  of  receipts,  by  the  sale  for  cash,  $425,516. 

But  nowhere  was  a  statement  of  how  many  shares  had 
been  sold  to  obtain  the  $425,516.  No  hint  as  to  the 
amount  of  the  stockholders'  remittance,  or  the  par  value 
of  the  total  amount  of  stock  sold.  Was  it  $425,516  or 
$4,255,160?  How  much  per  share  reached  the  com- 
pany's treasury? 

Of  course  a  prospective  investor  is  even  comparatively 
safe  only  when  purchasing  new  securities  from  long:  es- 
tablished, substantial  rirms  of  good  reputation.  After  an 
unfortunate  flotation  of  securities  the  small  firm  can 
and  often  does,  simply  abandon  its  office  furniture,  and 
is  seen  no  more.  On  the  other  hand,  some  of  the  larg- 
est firms  have  had  unenviable  records,  and  how  they 
manage  to  replenish  their  clientele  is  a  standing  mystery. 

All  houses  which  assume  the  marketing  of  a  new 
issue  should  not  only  insist  upon  the  appointment  of  a 
reputable  accounting  firm  as  auditors,  and  quarterly 
statements  of  earnings  for  publication,  but  at  least  one 
representative  on  the  board  of  directors,  in  order  to  safe- 
guard continuously  the  interests  of  their  customers. 


204          How  to  Analyze  Industrial  Securities 

The  officers  of  some  new  promotion  corporations  keep 
no  books  of  record  at  all,  not  even  of  stock  transfers. 
Many,  such  as  Kathodian  Bronze,  do  not  own  the  plants 
their  stock  enthusiasts  boast  about,  and  are  hopelessly  in 
debt  while  the  securities  are  eagerly  absorbed.  It  is  im- 
possible to  obtain  any  information  at  all  in  regard  to 
many  companies,  though  their  stocks  were  "active"  a 
few  months  ago,  and,  of  course,  the  market  has  vanished 
entirely. 

Not  long  ago  the  writer  was  talking  to  a  man  who  is 
an  executive  officer  in  twenty-five  to  thirty  corpora- 
tions, large  and  small.  The  writer  hazarded  his  con- 
viction that  it  seldom  paid  to  purchase  securities  in 
new  propositions — that  by  and  large  it  didn't  pay. 
"Well,"  was  the  reply,  "it's  according  to  whether  one 
gets  in  on  the  cellar  or  the  garret  level." 

Promotion  schemes  are  certainly  devious  and  a  pro- 
spective purchaser  of  new  securities  can  well  afford  to 
hold  his  funds  unless  every  fact  is  demanded  and  ven- 
ded, and  every  consideration  analyzed.  Then,  if  on  the 
whole  the  proposition  has  merit,  he  may  be  justified  in 
venturing  such  a  part  of  his  funds  as  he  could  spare 
permanently  without  sacrifice. 


Federal  Trade  Commission  Query 

The  Federal  Trade  Commission  of  Washington  has 
adopted  a  form  of  inquiry  blank,  which  new  companies 
are  required  to  fill  out  and  forward  to  the  Stocks  and 
Securities  Division  of  the  Commission.  The  Commis- 
sion shows  good  sense  in  these  questions.  They  are 
highly  embarrassing  to  the  exploiter,  but  it  should  be 
pointed  out  that  there  is  no  attempt  to  force  the  pro- 
moters or  management  of  any  corporation  to  give 
security  for  "quarterly  complete  statements  of  income 
and  profit  and  loss"  or  balance  sheets  m  the  future. 
Even  if  all  the  questions  below  are  answered  satis- 
factorily, it  must  be  remembered  that  this  is  no  guar- 
antee against  mismanagement  and  ill  fortune  in  the 
future.  If  the  Commission  forces  satisfaction  on  the 
32  questions  however,  the  technique  of  the  typical 
professional  security  criminal  will  have  to  make  a 
revolutionary  change.  As  far  as  I  can  find  out  there 
have  been  no  material  differences  in  the  contents  of 
the  bags  of  tricks  used  for  some  centuries.  It  cer- 
tainly would  be  interesting  if  every  security  prospect 
would  insist  upon  having  a  true  copy  of  the  answers 
to  the  Federal  Trade  Commission  before  considering 
the  purchase  of  securities  in  any  new  proposition. 


(205) 


206          How  to  Analyze  Industrial  Securities 


Date. 

Name  of  Company 

Principal  place  of  Business 


ORGANIZATION  : 

1.  Date  of  incorporation? 

2.  State  of  incorporation?    Statutory  office? 

3.  Places  other  than  principal  office  where  company  maintains 

office  or  does  business? 

4.  In  what  States  other  than  the  State  of  incorporation  is  the 

company  authorized  to  do  business?     To  sell  stock? 

5.  Amount  of  preferred  and  common  stock  authorized ;  state 

the  par  value  of  each? 

6.  Amount  of  preferred  and  common  stock  issued,  or  agreed 

to  be  issued? 

7.  What  bonds,  debentures  and  secured  obligations  have  been 

issued,  agreed  to  be  issued  or  are  about  to  be  issued; 
describe  each? 

8.  Is  the  company  the  result  of  any  consolidation,  merger,  or 

reorganization;  if  so,  give  details? 

9.  What  subsidiary  companies  are  controlled  by  stock  owner- 

ship or  otherwise,  with  the  amount  and  percentage  held 
in  each? 

10.  Give  the  names,  address,  then  and  now,  of  each  officer,  di- 

rector, promoter  and  organizer,  who  has  been,  is  now,  or 
is  proposed  to  be  connected  with  or  interested  in  your 
company,  with  their  experience  and  qualifications? 

11.  State  the  compensation,  benefit,  advantage,  stock,  securities, 

cash  or  otherwise,  promised  or  paid  for  their  activities, 
services  or  properties  transferred,  as  to  each? 

12.  Give  the  names  and  addresses  of  the  seven  largest  stock- 

holders, and  the  amount  held  or  issued  to  each,  considera- 
tion in  moneys,  services  or  property  paid  or  agreed  to  be 
paid  by  each? 


Federal  Trade  Commission  Query  207 

BUSINESS  : 

13.  Describe  briefly  the  business  purposes  and  objects  of  your 

company;  where  it  is  to  be  conducted;  the  facilities  and 
plant  available  therefor? 

14.  When  did  or  will  your  company  commence  business?    The 

amount  of  capital  paid  up  at  the  commencement  of  busi- 
ness? 

15.  Have   you   or  will  you  take  over  any  existing  business. 

Describe  it? 

PLANS : 

16.  What  is  your  immediate  plan  of  action;  what  amount  of 

money  will  be  necessary  to  accomplish  it;  how  is  it  pro- 
posed to  raise  this  money;  what  stocks  or  securities  are 
to  be  sold  therefor  or  have  been  sold,  and  on  what  basis? 

17.  Do  you  propose  or  are   you  selling  your  stock  direct  or 

through  others;   state  who? 

18.  Give  the  names  and  addresses  of  all  stock  or  securities  sales 

agents  or  representatives  now  in  the  field? 

19.  Describe  accurately  the  compensation  paid  or  to  be  paid; 

discounts  allowed  and  benefits  promised  or  agreed  to  be 
given  to  each? 

20.  At  what  price  are  your  stocks  or  securities  to  be  sold? 

21.  What  percentage  of  the  gross  proceeds  thereof  are  to  be 

paid  to  your  company? 

22.  Have  the  stocks  or  securities  which  you  propose  to  sell  been 

underwritten  and  on  what  basis,  or  are  you  otherwise 
assured  that  all  of  the  funds  needed  will  be  obtained? 

23.  To  what  extent  are  subscriptions  to  be  made  conditional 

upon  your  obtaining  total  subscriptions  or  a  given  amount 
and  what  amount? 

24.  Annex  copies  of  all  literature,  advertisements,  prospectuses 

and  circulars  used  in  furtherance  of  the  sale  of  your  stocks 
and  securities  by  yourself  or  others,  and  any  instructions 
to  your  stock  salesmen? 

PROPERTIES  : 

25.  Describe  accurately,  but  briefly,  the  properties  acquired  or 

to  be  acquired,  real  and  personal,  with  all  improvements  or 
plant  now  or  to  be  placed  thereon,  the  amounts  paid  or  to 
be  paid  in  money,  stocks,  bonds,  securities  or  otherwise, 
therefor  and  the  actual  value  of  each  portion  or  parcel 
thereof. 


208          How  to  Analyze  Industrial  Securities 

FINANCIAL  CONDITION  : 

26.  Annex  a  copy  of  a  trial  balance  sheet  and  profit  and  loss 

statement,  prepared  for  the  purpose  of  your  report  here- 
under  or  made  up  within  thirty  days  prior  to  the  date  of 
this  notice. 

27.  Attach  a  copy  of  the  last  annual  and  last  quarterly  balance 

sheet  arid  profit  and  loss  statement. 

28.  As  to  the  assets  enumerated  therein,  describe  briefly  each 

item  and  state  the  actual  cost  and  the  present  estimated 
value  thereof. 

29.  State  the  book  value  of  each  class  of  stock  per  share  and 

the  estimated  actual  value  thereof  eliminating  all  doubtful, 
contingent,  speculative  or  excessively  valued  assets,  stating 
what  is  eliminated  and  why? 

30.  State  any  existing  facts  or  probable  developments  concern- 

ing your  company,  its  officers,  directors,  managers,  brokers, 
or  representatives,  properties,  business  or  prospects,  which 
have  not  been  covered  by  preceding  questions,  but  which 
should  be  made  known  to  an  investor. 

31.  Do   you   offer   to   accept,   exchange   or    dispose   of   Thrift 

Stamps,  War  Saving's  Stamps,  or  Liberty  Bonds  in  order 
to  sell  your  own  stock  or  securities? 

32.  If  your  answer  to  question  31  or  any  part  thereof  is  yes, 

will  you  voluntarily  cease  and  desist  from  such  practices 
in  the  future? 

The  Commission  also  calls  attention  to  the  fact  that 
it  is  a  penal  offense  punishable  by  fine  and  imprison- 
ment, to  misrepresent  the  facts  or  make  false  state- 
ments in  answering  any  one  of  the  above  questions. 


INDEX 


NOTE. — Reference  to  certain  balance  sheet  and  balance  sheet 
schedule  accounts,  requiring  little  explanation  and  not  directly 
indexed,  will  be  found  by  referring  to  the  index  covering 
main  headings  on  page  77. 


Accrued  Expenses,  148 
Administrative  Expense,  177 
Advertising,  Advantage  of  large 

Corporations,  18 
Allis-Chalmers  Mfg.  Co. 

Assets,  89;  Book  value  of  old 
preferred,  163;  Competition, 
44;    Patent  suit,    106;   Re- 
organization, 128. 
American  Agricultural  Chemical 

Co. 

Provision  of  convertibles,  145 
American  Can  Company. 

Diversification  of  Products, 
25,  26;  Management,  48; 
Narrowing  Profits,  42 ;  Pat- 
ent Suit,  104;  Purchase  of 
Materials,  58 

American  Car  &  Foundry  Com- 
pany. 

Reserves,  76,  158 
American  Chicle  Company. 

Integration,  33 

American  Cotton  Oil  Company. 
Cannot  be  integrated,  33;  Di- 
versification of      products, 
28;  Goodwill,  101,  102 
American  Hide  &  Leather  Com- 
pany. 

Reports  of  earnings,  5,  6 
American  Ice  Company. 
Financial     policy,     66;  Inte- 
gration, 32 

American  International  Corpo- 
ration. 

Profit  sharing,  56;  Specula- 
tive possibilities,  198,  199 


American  Linseed  Company. 
Diversification    of    products, 
38 ;  Possible  integration,  35 ; 
Strong  support,  57 
American  Locomotive  Company 
Experience  in  automobile  field, 
51,     52,     53;  Location     of 
plants,  39 
American     Malting     Company 

(Old). 

Dividend  policy,  64,  65;  Ob- 
solete plants,  84. 
American  Steel  Foundries  Co. 

Reports  of  earnings,  6 
American  Sugar  Refining  Com- 
pany. 

Incomplete  reports  formerly, 
75;  Other  income,  179,  180 
Armour  &  Company 

Insurance,    91;  Provisions  of 

bond  indenture,  133 
Assets  Realization  Company. 

Unfortunate  developments,  51 
Assets,  Valuation,  82,  83 
Audit,  Danger  of  Partial  Audit, 

72,  73 
Automobile  companies,  Problem 

of  integration,  34 
Average  Profits,  188 

Balance  Sheet,  69-161;  Com- 
plete, 77,  78,  79;  Lack  of 
uniformity,  69,  70;  Rela- 
tion to  financing,  136 

Baldwin  Locomotive  Company. 
Working  agreement,  58 


(209) 


Index — Continued 


Bethlehem  Steel  Corporation. 
Dividend    policy,    63;  Insur- 
ance,90;  Profit  sharing,  55; 
Provisions  of  preferred  stock 
140 

Bills  Payable,  148,  149 
Bond  Limitation,  127-136 
Bonds — when  good  finance,  129 
Book  value,  161,  162,  163 
Brands,  103 

British  Companies  Act,  200,  201 
Business  Factors,  21-41 
By-products,  advantages  of  large 
corporations,  19 

Capital,  Relation  to  labor,  4 
Capital  or  fixed  assets,  77,  78, 81 ; 
improper  accounting,  172,  180 
Capital  Stock,  77,  137-141 
Capital  Surplus,  160 
Capitalization    form    changing, 

143-145 
Carnegie  Steel  Company. 

Accounting  control,  2 
Colorado  Fuel  &  Iron  Company. 
Dividend  policy,  138;  Strong 

support,  57 
Compensation  to  promoter  and 

underwriters,  202 
Competition,  41-45 
Contingent  Liabilities,  150,  151 
Convertible  Bonds. 
Favorable    finance    measure, 

144 

Co-operation  and  Loyalty,  51-56 
Co-operation  in  industries,  4 
Corn  Products  Company. 

Closing  of  plants,  18;  Compe- 
tition,   44;  Re-organizations 
in  the  industry,  83 
Cost  of  Sales,  175 
Cotton  Duck  Consolidation  Dif- 
ficulties, 49 


Crown  Cork  and  Seal  Company. 
Diversification    of    products, 

28;  Prudent  policy,  61 
Current  Assets,  accounts,    115- 

117;  Incorrect  practice,  109 
Current     Liabilities     Accounts, 

77-78;  147-151 

D  &  C  Company. 
Sale  of  securities,  98 

Deductions  from  Income,  see  In- 
terest. 

Deferred  Assets,  77,  78, 123-126; 
General  Electric,  155 

Demand  for  Product,  Changes, 
22,23;  Failure  of,  10;  Fluc- 
tuations, 21-23;  Failure,  22 

Depreciation,  Methods,  86;  Ne- 
cessity for  direct  charges, 
84,85,86;  Relation  to  busi- 
ness, 85;  Requirement  va- 
ries, 85 

Diamond  Match  Company 
Diversification  of  products,  28 

Discount  on  Stocks  and  Bonds, 
126 

Diversification  of  Products,  25- 
28 

Dividends. 
Accounting,  185,  186 

Eastman  Kodak  Company. 
Patent  Suit,  105;  Trade  name, 

42 

Elasticity  in  capacity,  10 
Endicott  Johnson  Shoe  Co. 

Register  notes  payable,  150 
Entz   Motor   Patents   Corpora- 
tion, 58 

Factory  Cost,  175,  176 
Federal  Trade  Commission. 
Power,  70;  Query,  205-208; 

Suggested    statement,    70; 

Standard,  165 


(210) 


Index— Continued 


Financial  Control  —  Alliances, 
57-59 

Financial  Policy,  61-67;  Weak- 
ening working  capital,  156; 
Conserving  dividends,  23 

Financial  Structure  and  Meth- 
ods compared  with  railroads, 
11 

Financing. 

Advantages  large  corporations, 
1 

Finished  Goods,  112 

Fire  Insurance,  90,  91 

Fixed  Assets,  77,  78;  Accounts 
included,  81-92 

Fixed  Charges,  Need  of  uniform 
accounting,  168 — also  see 
interest. 

Floating  Debt,  156 

Ford  Motor  Company. 

Anticipating  competition,  43; 
Book  value  of  stock,  161, 
162 

Foreign  Trade,  Advantage  of 
large  corporations,  19 

Gambling  in  Securities. 

Definition,  1 
General  Chemical  Company. 

Profitsharing,  55 
General  Electric  Company. 
Conservative  financial  policy, 
23;  Depreciation,     88;  Di- 
versification of  products,  88 ; 
Labor  situation,  55;  Main- 
tenance, 88,  89;  Narrowing 
profits,  42 ;  Patent  suit,  106; 
Strength  of  debentures,  134; 
Working    agreements,     58; 
Working  capital,  154 
General  Expense,  170, 177;  Need 
of  uniform  accounting,  168 
General  Motors  Company. 
Overvaluation  of  assets,  82 


Gillette  Safety  Razor  Company. 
Diversification    of    products, 
28;  Patent  monopoly,  42 

Glucose   Sugar    Refining   Com- 
pany. 

Assets  overvalued,  83;  Divi- 
dend policy,  64 

Goods  in  Process,  112 

Goodwill,  99-102 ;  Figuring  book 
value,  163 

Gross  Earnings — see  Gross  Sales. 

Gross    Income — see   Total     In- 
come. 

Gross  Income — see  Gross  Sales. 

Gross  Profits  on  Sales,  175,  176, 
177 

Gross  Sales,  171-173,  178 

Hidden  Assets,  69,  89 

Holding  Companies. 

Current  accounts,  116-117; 
Fraud  easy,  95,  96;  Inven- 
tories, 113. 

Income  Account,  165 — 187 
Called  variously,  167;  Consis- 
tent form  necessary,    167- 
169;       Consolidated    state- 
ment,   168,    169;  Federal 
Trade  Commission  sugges- 
tion, 170;  Lack  of  standard- 
ization,    165;  Relation    to 
balance  sheet,  165;  Several 
years  required,  168 

Insurance  Fund,  77,  78, 121 

Insurance  paid  in  advance,  124 

Intangible  assets. 
To  be  stated  separately,  81 

Integration,  31-35 
Advantage  of  large  corpora- 
tions, 19 

Interest,  183 

International  AgriculturalChem- 
ical  Corporation. 


(211) 


Index— Continued 


Contract  with  Tennessee  Cop- 
per Merger  suggested,  35, 
58,  59 

International  Harvester  Co. 
Relation  to  competitors,  3; 
Contingent  liability,  151; 
Diversification  of  products, 
28;  Foreign  trade,  19;  In- 
tegration, 31;  Listing  state- 
ment, 96 

International  Steam  Pump  Com- 
pany. 

Control  of  business,   41;  Lo- 
cation of  plants,  38 
Inventories,  109-113,  154,  175 
Investment. 

Definition,  1 
Investments,  93-96 

Jamestown  Art  Metal  Company. 
Competition,    45;  Change    in 
line,  45 

Kathodian  Bronze,  204 

S.  S.  Kresge  Co. 

Capitalization  pledge,  139; 
Character  of  sales,  21 ;  Form 
of  capitalization,  133;  In- 
terest of  founders,  54;  Pru- 
dent policy,  61,  63 

Labor. 

Relation  to  capital,  4. 
Lackawanna  Steel  Company. 

Diversification    of    products, 

26,27 
Large  Scale  Production. 

Advantages,  17,  18,  19,  20 
Leather  Industry. 

Competition,  45 
Lee  Tire  &  Rubber  Co. 

Form  of  capitalization,  133 
Life  Insurance. 

Importance  to  corporation,  48 


Liggett  &  Myers  Tobacco  Co. 
Depreciation  and  obsolescence, 

Listing' Statements,  200 
Location,  37,  38,  39 

Advantage  in  owning  several 

plants,  17-19 
Loose- Wiles  Biscuit  Co. 

Deferred  charges,  125. 

McCormick  Harvester  Co. 

Patents  and  goodwill,  106,  107 
McCrory  Company. 
Capitalization  pledge,  139;  In- 
terest of  founders,  54;  Form 
of  capitalization,  133 
McCrum-Howell  Company. 
Misleading  statement,  73;  Un- 
fortunate capitalization,  50 
Maintenance,  84,  86-88 
Management,  47-61 
Advantage    of    large    corpor- 
tions,     19;  General    Motor 
Company,  82 
Magnitude  of  Industrials. 

Census    figures   on    manufac- 
tures, 13 
Marshall  Field  &  Company. 

Insurance,  91 
Margin  of  Safety,  187 
Maxwell  Motor  Company. 

Re-organization,  28 
Mergenthaler  Linotype  Co. 
Form  of    capitalization,    132, 

133  Patent  monpoly,  12 
Midvale  Steel  Company, 
Financial  evolution,  66 
Monopoly,  41 

National  Asphalt  Co. 

Unwieldy  financial  structure 

127 
National  Cash  Register  Co. 

Patent  suits,  106 


(212) 


Index — Continued 


National  Cordage  Company. 

Unwieldy  financial  structure, 

127 
National  Enameling  Co. 

Provisions  of  indenture,   133, 

134 
National  Lead  Company. 

Possible  integration,  35 
National  Starch  Manufacturing 
Company. 

Assets  overvalued,  83 
Net  Income,  185 

Several  years  desirable,  188 
Net  Profits,  177,  178 
Net  Quick  Assets,  154 
Net  Sales,  173,  175-177 
New  England  Cotton  Yarn  Com- 
pany. 

Assets  overvalued,  83;  Dividend 
policy,  64;  Management,  53 
New  Promotions,  189-204 
New  York  Stock  Exchange. 

Reports  required,  7 
Notes  Payable. 

Danger  149;  Registering,  150 
Notes  Receivable,  115,  116 

Obsolescence,  84 
Organization  Expense,  124 
Other  Income,  179,  180 

Patents,  103-107 

Capitalizing,  104 
Pennsylvania  Steel  Company 

Rehabilitation  required,  84 
Pension  Fund,  77,  121 
Permanent  Investments,  93-97 
Personal  Equation,  47-54 
Plant  and  Equipment,  81-92 
Potash. 

Location  of  supply,  38 
Preferred  Stocks. 

Danger  of  over-issue,  137;  In- 
teresting provisions,  140, 
141;  Necessary  evil,  k!38; 
Redeemable,  139 


Prest-O-Lite  Company. 

Diversification  of  products,  27 
Procter-Gamble. 

Profit-sharing,  55 
Profit  and  Loss  Items,  181,  185 

Capital    asset    receipts,    180. 

See  also  Income  Account. 
Profit  and  Loss  Surplus,  159,  160 
Public  Accountants. 

Certificates,  71-73 
Publicity. 

Policy    and    means,    Preface, 

5-7;  Necessity,  7 
Purchases,  175 

Purchasing    by    large    corpora- 
tions, 18 
Production  Methods. 

Advantage  of  large  corpora- 
tions, 18 
Pugh  Stores. 

Misleading  statement,  73 

Quick  Assets,  154 

Railway  Business  Association. 
Co-operation    in    the    equip- 
ment industry,  4 
Railways. 

Compared    with    industrials, 

9-11 
Re-capitalization. 

Dangers,  50 

Republic  Iron  &  Steel  Company. 
Diversification    of    products, 

26;  prudent  policy,  62 
Reserves,  77-79;  157-158 

Plant  and  equipment,  method, 
86;  Investments,  94;  Treas- 
ury, securities,  98;  Inven- 
tories, 111;  Current  assets, 
115, 117 
Riker-Hegeman  Company. 

Difficulties,  49 
M.  Rumely  Company. 

Unfortunate   recapitalization, 
50;  working  capital,  155 


(213) 


Index — Continued 


Sears  Roebuck  &  Company. 
Sales  reports,  5 ;  Special  insur- 
ance, 92 
Securities,  117 
Selling  Expense,  177 
Shipbuilding. 

Standardization,  37 
Short-term  notes. 

Dangers,      135;  Reasons     for 

issue,  134 

Singer    Sewing    Machine    Com- 
pany. 
Foreign  Trade,    19;  Form  of 

capitalization,  132 
Sinking  Funds,  77,  78,  119-121 
Speculation. 

Definition,  1 
Stability  of  Earnings. 

Compared  with  railroads,  9 
Standardization. 

Lack  in   industrials,    10,   47; 
Railway,    47;  Tendency 
toward,  49;  limits,  49 
Standard  Oil  Companies. 

Form  of  capitalization,  132 
Standard  Oil  Company  (Old). 
Incomplete  reports,  75;  Man- 
agement, 48;  Prudent  pol- 
icy, 62 
Subsidiaries. 

Opportunity    for    misleading. 

168 

Sugar  Companies. 
Competition,  43 
Surplus,  159,  160,  185 
Surplus    Beginning    of    Period, 

185,  186 

Surplus  Ending  of  Period,  185 
Swift  &  Company. 
Narrowing  profits,  43 

Tangible  Assets. 

To  be  given  separately,  81 
Taxes,  181 


Tennessee  Copper  Company. 
Contracts,  58,  59;  Merger  sug- 
gested, 35 

Total  of  Gross  Income,  181 

Trademarks,  103,  107 

Trading    and    Working    Assets, 
109-113 

Treasury  Securities,  97,  98 

Union  Bag  &  Paper  Company 

(Old). 

Dividend  policy,  65,  66 
United  Cigar  Stores. 

Diversification   in   effort,    29; 

Standardization,  49 
United  Fruit  Company. 

Changing  form  of  capitaliza- 
tion, 143,  144;  Integration, 

United   States  Cast   Iron    Pipe 

and  Foundry  Company. 
Management,  48 
United  States  Realty  (Old). 
Dividend    policy,    64;  Good- 
will,   101;  Labor  situation, 
55 

United  States  Rubber  Company. 
Complete  integration,  19-32; 
Diversification  of  Products, 
27;  Loss  in  inventory,  1 1 1 ; 
Refunding  early  maturities, 
136;  Subsidiary  obligations, 
96 

United  States  Shipbuilding  Co. 
Unwieldy  financial  structure, 

127 
United  States  Steel  Corporation. 

Location  of  plants,  38 
United  States  Steel  Corporation. 
Closing  plants,  18;  Deprecia- 
tion,  87;  Dividend   policy, 
62-64;  Foreign    trade,    19; 
Integration.  31 ;  Location  of 
plants,   38;  Management, 
54;  Ore  holdings,  162,    163; 


(214) 


Index — Continued 

Profit  sharing,  55;  Sinking  Westinghouse  Electric  and  Mfg. 

funds,    120,    121;  Working  Co. 

capital,  153,  154  Investments,    94,    95;  Unfor- 

Use  and  Occupancy  Insurance,  tunate  maturities,  75,  135; 

Working  agreements,  58 

Varieties  of  Industrials,  14,  15  p.  W.  Woolworth  Company. 

Vulcan  Detinning  Company.  Advantages  in  scattered  loca- 

Cannot  be  integrated,  33;  Pat-  d         39    Book      j        163 

ents,  104,  105  Character  of  sales,  21;GoocL 

Western  Electric  Company.  will>    100>    1045  Capitaliza- 

Conservative  financial  policy,  tion,  pledge,  139;  Fire  risk, 

23;  Standardization  in  per-  90;  Interest  of  founders,  54; 

sonnel,  49  Net  quick  assets,  153 


(215) 


Ten  Years  or  Investment 
Protection 

A  D      A  A  decade  ago  Mr.  Moody  founded 

6  his  institution  for  the  protection  of 

of  buccess  investors.  Nowhere  could  the  aver- 
age investor  turn  to  secure  absolutely  .unbiased  and 
independent  guidance  in  the  investment  of  his  funds. 
To  fill  this  urgent  need  for  unbiased  guidance 
"Moody's  Investors  Service"  was  founded.  The 
institution  has  expanded  with  every  year  until  it 
now  caters  to  many  thousand  clients.  Banking  and 
investment  institutions,  dealers  in  securities,  trustees 
of  estates  and  private  investors  employ  its  facilities 
on  an  ever  widening  scale.  Its  service  has  become 
as  essential  to  the  investor  and  financier  as  is  the 
mercantile  agency  to  the  business  man. 

^  £  The  basis  of  our  work  is  the  stan- 

dardized system  of  RATING  se- 
the  Service  curities  as  developed  in  our  Rating 
Books.  These  books  are  really  financial  "manuals" 
of  mammoth  scope,  and  contain  full  descriptions  of 
all  corporations  and  their  securities,  as  well  as  all 
municipal  and  government  obligations,  domestic  and 
foreign,  with  expert  analyses  showing  latest  earn- 
ings and  averagel  earning  power  over  a  series  of 
years,  financial  condition,  "margin  of  safety"  of 
all  securities,  etc.  All  the  bonds  and  stocks  are 


classified  and  rated,  in  accordance  with  their  position 
and  security.  Thus,  the  highest  grade  issues  receive 
an  "Aaa*"  rating,  the  next  grade  "Aaa,"  then  "Aa," 
"A,"  "Baa,"  "Ba,"  "B,"  "Caa,"  etc.,  until  the  very 
poorest  securities  are  reached.  A  security  given  an 
"Aaa*"  rating  is  to  be  regarded  as  practically  ideal  in 
both  security  and  market ;  one  given  a  "Baa"  rating 
is  partly  speculative,  but  generally  good  as  a  busi- 
ness man's  investment";  a  "Ba"  rating  means  a 
"speculative"  investment;  a  "B"  rating  means  a 
speculation,  while  a  "Caa"  rating  is  almost  exclu- 
sively speculative.  The  user  of  the  books  is  thus 
able  to  ascertain  at  a  glance  the  exact  character  and 
standing  of  any  security  he  holds  or  contemplates 
purchasing. 

But  "Rating  Books"  alone  cannot  cover  individual 
or  specific  investment  problems;  these  we  cover  by 
a  system  for  the  expert  supervision  of  investments. 
On  subscribing,  each  client  submits  to  us  a  confiden- 
tial list  of  his  security  holdings.  If  submitted  in 
person  we  discuss  the  list  with  him,  passing  careful 
judgment  upon  it,  after  which  we  file  with  him  a 
complete  report.  We  point  out  all  the  pitfalls  and 
show  the  investor  how  to  conserve  his  capital  as 
well  as  increase  its  value  and  enlarge  his  income. 

This,  however,  is  but  the  beginning  of  the  service 
we  render.  Investments  require  constant  attention, 
and  we  continue  to  supervise  our  clients'  interests 
all  through  the  year.  We  keep  them  in  touch  with 
new  developments  through  a  correspondence  and 


bulletin  service.  This  is  vitally  important  as  new 
problems  constantly  come  up  in  connection  with 
one's  investment  holdings;  many  frequently  have 
new  funds  to  invest ;  new  securities  are  always  being 
issued;  suggested  changes  are  constantly  made  by 
dealers  and  so  forth. 

In  addition  to  these  personal  supervisory  features, 
each  client  regularly  receives  special  letters,  reviews, 
forecasts,  analyses  and  timely  records  of  great  value. 
These  include  the  Weekly  Review  of  Financial 
Conditions,  a  special  weekly  analysis  of  some  par- 
ticular property,  letters  and  forecasts  on  the  Bond 
Market  and  on  New  Investments,  a  Monthly  Busi- 
ness Barometer,  a  Monthly  Quotation  Record  and 
Monthly  Reports  of  Earnings.  Each  client  is  fur- 
nished with  adjustable  binders  for  riling  these  let- 
ters, analyses  and  forecasts.  We  also  furnish  an 
Investor's  Record  Book  and  four  text  books  on  in- 
vestment subjects,  the  latter  entitled  "How  to  Invest 
Money  Wisely,"  "How  to  Analyze  Railroad  Re- 
ports," "How  to  Analyze  Industrial  Securities"  and 
"Sound  Investing." 

ryr  The  complete  service,  including  all 

the  Rating  and  Text  Books,  is  fur- 
nished for  a  fee  of  $200  per  year,  payable  in  ad- 
vance. Subscriptions  may  begin  at  any  time. 

MOODY'S  INVESTORS  SERVICE 

JOHN  MOODY.  President 
35  Nassau  Street  Telephone.  Rector  2947-8-9  New  York  City 


THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
STAMPED  BELOW 


AN  INITIAL  FINE  OF  25  CENTS 

WILL  BE  ASSESSED  FOR  FAILURE  TO  RETURN 
THIS  BOOK  ON  THE  DATE  DUE.  THE  PENALTY 
WILL  INCREASE  TO  5O  CENTS  ON  THE  FOURTH 
DAY  AND  TO  $1.OO  ON  THE  SEVENTH  DAY 
OVERDUE. 


MAR   3 


APR  9 


rtf. 


4* 


0£C 


13 


JUN    9    1943 


YB  '1804; 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 


